[Answered] “The nationalisation of banks was an economic milestone in the India’s growth story.” Critically analyse.

Demand of the question
Introduction. Contextual Introduction.
Body. Achievement of nationalisation of banks and some fallouts.
Conclusion. Way forward.

Nationalisation of bank has a long history in economic growth story of India. In 1969 14 major Indian commercial banks of the country were nationalised. In 1980 another 6 banks were nationalised. This helped not only in economic growth but ensured banking to reach the unprivileged and helped many to come out of poverty.

What Nationalisation of Banks has achieved in India over decades:

  1. Branch Expansion: Initially, the banks were conservative and opened branches mainly in cities and big towns. Branch expansion gained momentum after nationalisation of top commercial banks. This expansion was not only in urban areas but also in rural and village areas.
  2. Reduction in monopoly: Initially, a few leading industrial and business houses had close association with commercial banks. They exploited the bank resources and prevent new business to enter in competition. Nationalisation of banks prevented the spread of the monopoly enterprise.
  3. Increased savings and reduced misuse: It led to increase in savings from the general public. Thus, nationalisation of banks ensured the availability of resources to the plan-priority sectors.
  4. 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 government was able to mobilise rural savings.
  5. Development of Priority Sectors: An important change after the nationalisation of banks is the expansion of advances to the priority sectors. One of the main objectives of nationalisation of banks to extend credit facilities to the borrowers in the so far neglected sectors of the economy. 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.
  6. Social Banking: Commercial banks, especially the nationalised banks have participated in the poverty alleviation Program launched by the government.
  7. Development of agriculture sector: Banks assisted the agriculture in many ways. It provides increased finance to agriculture. This helped in reducing exploitation of farmers by money-lenders.
  8. 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 to achieve balanced inter-regional development and remove regional disparities.
  9. 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 better way.
  10. 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.

Some issues due to nationalisation of banks:

  1. Inefficiency: After the nationalisation banks are known for their inefficiency and corrupt practices. Rise in NPAs over the decade is a result of such corrupt practices and inefficiencies.
  2. Less attractive customer’s service: Indecision, corruption, and lack of responsibility are the evils which the government banks are suffering. A government bank generally do not care to attach importance to the customer service and thus mistreat their customers by denying them services and moving them from one counter to another.
  3. Economics of Branch expansion: Nationalisation though helped in facilitating branch expansion to rural areas much more rapidly than the private banks but banks are meant to do business and satisfy itself that the new branch is economically viable. Often rural branches are less self sufficient and face loses due to less amount of savings and more expenditures. Lack of professional attitudes in banking professionals in govt owned banks as they do not benefit from the business of the bank is often a result of this.
  4. Increased corruption: Corruption in banks by officers is increased due to their power to sanction advances and loans which leads to NPAs.
  5. Increasing NPAs: Govt pressure from the top for implementing even loss making schemes or full waiver of loans for electoral benefits has led to increase in NPAs to a dangerous level. Govt support and corruption on the top level means that big defaulters like Vijay Mallya go free.

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.