Insights into Editorial: Public Sector Banks during its journey of 50 years of nationalization:
The nationalisation of banks in 1969 was a watershed moment in the history of Indian banking.
From July 19 that year, 14 private banks were nationalised; another six private banks were nationalised in 1980. It is certain that one cannot locate a similar transformational moment in the banking policy of any country at any point of time in history.
The nationalized or public sector banks (PSBs), accounting for nearly 70 percent of total banking in the country have been doing great service to the nation. The spread of banking network in rural areas, and disbursement of rural credit has been mainly because of PSBs.
Banking sector at the time of India’s Independence:
At the time of Independence, India’s rural financial system was marked by the domination of landlords, traders and moneylenders.
In 1951, if a rural household had an outstanding debt of Rs.100, about Rs.93 came from non-institutional sources.
From the 1950s, there were sporadic efforts to expand the reach of the institutional sector, particularly in the rural areas. Despite these measures, the predominantly private banking system failed to meet the credit needs of the rural areas.
Watershed moment in Indian Banking History: Class to mass banking:
India’s banking policy after 1969 followed a multi-agency approach towards expanding the geographical spread and functional reach of the formal banking system.
- First, as a part of a new branch licensing policy, banks were told that for every branch they opened in a metropolitan or port area, four new branches had to be opened in unbanked rural areas.
- As a result, the number of rural bank branches increased from 1,833 (in 1969) to 35,206 (in 1991).
- Second, the concept of priority-sector lending was introduced. All banks had to compulsorily set aside 40% of their net bank credit for agriculture, micro and small enterprises, housing, education and “weaker” sections.
- Third, a differential interest rate scheme was introduced in 1974. Here, loans were provided at a low interest rate to the weakest among the weakest sections of the society.
- Fourth, the Lead Bank scheme was introduced in 1969. Each district was assigned to one bank, where they acted as “pace-setters” in providing integrated banking facilities.
- Fifth, the Regional Rural Banks (RRB) were established in 1975 to enlarge the supply of institutional credit to the rural areas.
- Sixth, the National Bank for Agriculture and Rural Development (NABARD) was constituted in 1982 to regulate and supervise the functions of cooperative banks and RRBs.
A to and fro: The government and the RBI probably saw the danger coming in banking policy:
Following measures were taken:
In 2004, a policy to double the flow of agricultural credit within three years was announced. Only public banks could make this happen.
In 2005, the RBI quietly brought in a new branch authorisation policy. Permission for new branches began to be given only if the RBI was satisfied that the banks concerned had a plan to adequately serve underbanked areas and ensure actual credit flow to agriculture.
In 2011, the RBI further tightened this procedure. It was mandated that at least 25% of new branches were to be compulsorily located in unbanked centres.
Outcome of these initiatives:
India’s nationalisation experience is an answer to mainstream economists who argue that administered interest rates cause “financial repression”.
Public banks also played a central role in furthering the financial inclusion agendas of successive governments.
Data show that more than 90% of the new no-frills accounts were opened in public banks.
The number of rural bank branches rose from 30,646 in 2005, to 33,967 in 2011 and 48,536 in 2015.
The annual growth rate of real agricultural credit rose from about 2% in the 1990s to about 18% between 2001 and 2015.
Much of this new provision of agricultural credit did not go to farmers; it largely went to big agri-business firms and corporate houses located in urban and metropolitan centres but recorded in the bank books as agricultural credit.
Benefits that reaped by India:
The role and contribution of PSBs in last 50 years has been exemplary and needs to be celebrated in this Golden Jubilee year.
These Banks were nationalized by an Act of Parliament and are now being consolidated, not privatized.
This process of consolidation reflects that PSBs are here to stay and expected to play a much bigger role as well as compete with the best in the industry.
It would be useful to have an evaluative study conducted on the role of PSBs in development of India.
This research-based study should distil lessons from last five decades of experience and provide guidance for better performance in future.
The outcomes of such a multi-agency approach were admirable. The share of institutional sources in the outstanding debt of rural households increased from just 16.9% in 1962 to 64% in 1992.
None can dispute the beneficial impact of bank nationalisation on the Indian economy but let us not forget that everything is transient in its time and place.
There are obvious unwanted consequences and developments that call for change now. The recommendations of the Narasimham Committees on banking sector reforms in the 1990s deserve a closer look.
The point of non-performing assets, the inherent deficiency of public sector banking in many areas and new issues require a holistic look.
It would be far more prudent to correct systemic faults that have crept in the sector in the course of the last 50 years than reversing a policy measure that has made financial inclusion a reality. Even merger to create a few leviathans may prove to be counterproductive.
Other issues include mergers of banks, the structure of non-banking financial companies and small- and medium-enterprises, holistic consolidation in banking and industrial structures. Change is of the essence.