Why Nationalisation of Banks was a Right Step?

Synopsis: Privatisation of PSBs will not be a solution for India’s banking sector distresses. The Nationalisation of Banks proved to be fruitful at the time of need. But now, it requires reforms and not privatization. 


The Union government announced that they want to privatize the Public Sector Banks (PSBs) in the recent budget. The government believes that this move will improve efficiency. However, it is not clear whether privatization brings efficiency or reduces associated risks.

The notion that only private banks are efficient is not correct. Many private banks failed around the world. Private corporate entities also have such large volumes of NPAs.

Moreover, bank nationalization helped in a revolution of India’s banking sector.

How the nationalization of banks helped in a revolution for India’s banking sector?

The nationalization of 14 private banks in 1969, followed by six more in 1980, transformed the banking sector. It created jobs, extended credit to the agriculture sector, and benefitted the poor.

  1. Firstly, the nationalization of banks helped in promoting more equitable regional growth, which is quite evident from RBI data. In 1969, rural areas had only 1,833 bank branches. It increased to 33,004 by 1995 and continued to grow further in the next decades. 
  2. Secondly, this resulted in reduced dependence on moneylenders in rural regions. Nationalized banking also improved the working conditions of employees in the banking sector. This happened because the state ensured higher wages, the security of services, and other fringe benefits.
  3. Thirdly, the Public Sector Banks played a huge role in making the country self-sufficient by supporting the green, blue, and dairy revolutions. They have also contributed considerably to infrastructural development.
  4. Fourthly, public sector banks in India are presently earning significant operating profits. The profits were ₹1,74,390 crore in 2019-20 and ₹1,49,603 crore in 2018-19.
What should be done instead of privatising the public sector banks?

PSBs handled by the private sector could result in denial of convenient and economical banking services to the common man. The risks of monopoly will only complicate the issue.

  1. Firstly, giving such a huge network of assets to private enterprises or corporates may turn out to be an irrational move. The government should strengthen the PSBs instead.
  2. Secondly, it would be unfair to blame Public Sector Banks alone for the alarming rise of NPAs. Strict actions are required to recover large corporate stressed assets, which is a key concern for the entire banking sector.
  3. Thirdly, the actions must include strong recovery laws and taking criminal action against wilful defaulters. The government has not shown a firm willingness to implement these measures till now. 
  4. Fourthly, there is an urgent and vital need to bring in a suitable statutory framework to consider wilful defaults on bank loans a criminal offense. 
  5. Lastly, a system to examine top executives of Public Sector Banks across the country will also help in improving accountability. But privatization of PSBs is not the ultimate remedy for the problems of the banking sector in India.

Defaults by large corporate borrowers, imposed through the impractical Insolvency and Bankruptcy Code, have resulted in a pile of write-offs, putting a big dent on the balance sheets of PSBs. This has not only affected the profitability of the banks but has also become an excuse to declare inefficiency.

Source: click here

Print Friendly and PDF