|Demand of the question Introduction. Contextual introduction. Body. Discuss achievements and criticism related to nationalisation of banks. Conclusion. Way forward.|
Nationalisation of banks has played an important role in the economic growth of India. In 1969, 14 major Indian commercial banks of the country were nationalised and another 6 were nationalised in 1980. This helped not only in economic growth but ensured banking to reach the unprivileged and helped many to come out of poverty.
Achievements due to nationalisation of banks:
- Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big towns. There has been a spectacular expansion of bank branches after nationalisation of major commercial banks. The lead bank scheme has played an important role in the bank expansion programme.
- Reduction in monopoly: Initially a few leading industrial and business houses had close association with commercial banks. They exploited the bank resources and prevented new businesses from entering the competition. Nationalisation of banks prevented the spread of the monopoly enterprise.
- Increased savings and reduced misuse: It led to an increase in savings from the general public. Thus, nationalisation of banks ensured the availability of resources to the plan-priority sectors.
- Greater mobilisation of deposits: The public sector banks opened branches in rural areas where the private sector has failed. Because of such rapid branch expansion, the government was able to mobilise rural savings.
- Development of Priority Sectors: An important change after the nationalisation of banks is the expansion of advances to the priority sectors. To achieve this, the banks formulated various schemes to provide credit to the small borrowers in the priority sectors, like agriculture, small-scale industry, road and water transport, retail trade and small business.
- Social Banking: Commercial banks, especially the nationalised banks have participated in the poverty alleviation program launched by the government.
- Development of the agriculture sector: Banks assisted agriculture in many ways. It provided increased finance to agriculture. This helped in reducing exploitation of farmers by money-lenders.
- Balanced Regional development: In a country, certain areas remained backward for lack of financial resources and credit facilities. Private Banks neglected the backward areas because of poor business potential and profit opportunities. Nationalisation helped to achieve balanced inter-regional development and remove regional disparities.
- Greater control by the Reserve Bank: In a developing country like India there is need for exercising strict control over credit created by banks. With nationalisation of banks RBI was able to control them in a better way.
- Greater Stability of banking structure: Nationalised banks led to more confidence in the customers about the safety of their deposits. Besides this, the planned development of nationalised banks imparted greater stability in the banking structure.
Criticism of nationalisation of banks:
- Failed in objectives: The Estimates Committee of Lok Sabha stated that nationalised banks have largely failed in achieving the main objectives of bank nationalisation like removing regional disparities through developing banking facilities in backward areas.
- Insufficient help to priority sectors: In spite of much increase in the loans advanced to the priority sectors, the total help is not sufficient for the large size of these sectors. The rate of increase in the advances to the priority sectors which was rapid in the initial years of post-nationalisation period has slowed down in the later years.
- Inadequate Facilities in Rural Areas: No doubt, much progress has been made in expanding bank branches in respect of bank expansion, deposit mobilisation and credit expansion in rural areas. But, it is not adequate to meet the financial needs of the population living in the rural areas.
- Regional Imbalances: Though the overall expansion in the bank branches has taken place in the country, their expansion is not equitably distributed among the different states. According to the Reserve Bank’s report about half of the banking institutions concentrate in the two regions i.e. southern and western region.
- Insufficient Deposit Mobilisation: Despite good progress on the deposit mobilisation front, much remains to be done. Deposit mobilisation by the public sector banks has been about 16 to 17% per annum since nationalisation. On the other hand, it has been found that the foreign banks and the smaller private banks have received much greater increases in deposits.
- Low Profitability: A major defect of banking after nationalisation is that the nationalised banks are either operating under losses or experiencing falling dividends. The profits of the commercial banks, which were quite high during fifties and sixties, have declined considerably in the post-nationalisation period.
- Low Efficiency: Nationalisation has created a bureaucratic attitude in the functioning of the banking system. Lack of responsibility and initiative, red-Tapism, inordinate delays are common features of nationalised banks. As a consequence, the efficiency of these banks has reduced.
- Increasing NPAs: Govt pressure from the top for implementing even loss making schemes or full waiver of loans for electoral benefits has led to an increase in NPAs to a dangerous level.
Thus nationalisation although has led to many benefits it had many unintended consequences leading to inefficiencies in banking. What is needed is providing more autonomy to banks with a vigilance body on all the top executives of major banks. Otherwise failure of many banks is nearby.