The nationalisation of 14 banks on 19th July 1969 was the most desirable and important economic cum social reform in independent India. After 2 days of Nationalisation, Mrs. Indira Gandhi explained to the Parliament the purpose, the expectation and the constitutional mandate.
Let’s have a look at the speech of Mrs. Indira Gandhi, Prime Minister in the Parliament after the promulgation of the Ordinance, nationalizing 14 banks.
| THE PRIME MINISTER, MINISTER. OF ATOMIC ENERGY, MINISTER OF PLANNING AND MINISTER OF FINANCE (SHRIMATI INDIRA GANDHI): Mr. Deputy Speaker Sir, an Ordinance was promulgated the day-before-yesterday, nationalising fourteen of the major commercial banks incorporated in India. With your permission, I should like to share with the House the considerations which weighed with Government in taking this momentous decision and the spirit in which they propose to implement it. Nearly fifteen years ago, Parliament approved that we should set before ourselves the goal of a socialist pattern of society. Since then, Government have taken several measures towards the achievement of this goal. Public ownership and the control of the commanding heights of national economy and of its strategic sectors, are essential and important aspects of the new social order which we are trying to build in the country. We regard this as particularly necessary in a poor country which seeks to achieve speedy economic progress, consistent with social justice, in a democratic political system—one which is free from the domination of a few, and in which opportunities are open to all. Financial institutions are among the most important levers that any society has at its command, for the achievement of its social and economic objectives. It is in recognition of this fact that, we nationalized life insurance business and the then Imperial Bank of India over a decade ago. Since then, we have also set up in the public sector, other institutions for the provision of medium or long-term finance to industry and agriculture. The nationalization of major banks is a significant step in this process of public control over the principal institutions for the mobilization of people’s savings and channelizing them towards productive purposes. After the serious difficulties which we have had to encounter in recent years, our economy is once again poised for fresh growth and development. There has been a notable breakthrough on the agricultural front, technologically and otherwise. The increase in our exports has been impressive. There has been substantial progress in power supply and the development of transport, as also the availability of trained manpower. Our industrial base has been strengthened and diversified. It is in this context that we launched the Fourth Plan earlier this year with confidence and determination. The question which has been engaging our attention for some time is how best to impart an element of dynamism and new vigor into the process of our development so that the targets of the Fourth Plan, in the public and private sectors, cannot only be fulfilled but if possible, exceeded. Our major concern has been to accelerate the tempo of investment and production, so as to improve living standards and increase employment opportunities, consistent with our determination to achieve self-reliance. It is necessary to mobilize the savings of the people to the largest possible extent, and to utilize them for productive purposes in accordance with our plans and priorities. Government believe that public ownership of the major banks, for which there has been widespread public support, will help in the most effective mobilization and deployment of national resources, so that our objectives can be realized with a greater degree of assurance. (SHRI PILOO MODY: why not all? why only 14?) The Ordinance promulgated by Government provides for the nationalization of all scheduled banks, incorporated in India, which had minimum deposits of not less than Rs.50 crores at the end of June last. The fourteen banks in this category, together with the State Bank of India and its subsidiaries which already operate under public ownership, account for more than 85% of bank deposits in this country. The House will appreciate that in view of the very nature of the measure, and also to forestall any possibility of manipulations which may not be in the public interest, ‘it was essential to make a swift and sudden move which could only be achieved through an ordinance. The fact that speculation about Government’s intentions had assumed an acute phase in the last few days rendered it all the more necessary to act without any further loss of time, and in anticipation of the approval of Parliament, which will be sought through a Bill which Government propose to bring during the current session. So far as foreign banks are concerned, they provide, by and large, business of a specialized nature such as facilitating foreign trade and tourism. The operation of banks of one country in another, subject to the laws of the land, is mainly for such purposes and is part of an international facility. Our Indian banks also maintain their branches in many countries. It has been Government’s general policy to confine the opening of new branches of foreign banks to major port towns, where their specialized services are needed. Having regard to all these factors, Government have decided to exclude branches of foreign banks incorporated outside India from the purview of the Ordinance. As I stated the other day, this is just the beginning of a new era of nationalization. Whatever the pattern of the economy, it is widely recognized that the operations of the banking system should be informed by a larger social purpose, and should be subject to close public regulation. Government have come to the conclusion that the desired regulation and rate of progress consistent with the urgency of our problems could be secured only through nationalization. I should like to reiterate my assurance that even after nationalization, the legitimate credit needs of private industry and trade, big or small, will be met. Indeed, it shall be our endeavour to ensure that the needs of productive sectors of the economy, and in particular those of farmers, small-scale industrialists and self-employed professional group are met in an increasing measure. It will be one of the positive objectives of nationalized banks to actively foster the growth of new and progressive entrepreneurs, and to create fresh opportunities for hitherto neglected and backward areas in different parts of the country. The banks will now be better placed to serve the farmer and to promote agricultural production and rural development generally. Public ownership will also help to curb the use of bank credit for speculative and other unproductive purpose. By severing the link between the major banks and the bigger industrial groups which have so far controlled them, government believe that the step they have taken will also bring about the right atmosphere for the development of adequate professional management in the banking field. Government attach the utmost importance to modern managerial techniques and practices. The moneys which depositors entrust to the banks are in the nature of a sacred trust. The interests of the depositors of the banks which have been nationalized will not only continue to be fully safeguarded but will now have the backing of the State itself. I should also make it clear that the emphasis on priority areas, new entrepreneurs and relatively backward areas will not be at the expense of considerations of economic viability. Only thus can we fulfil our obligations to those who have entrusted their savings to us for the benefit of the community. But economic viability can still admit of much greater resourcefulness in lending to priority areas than has been the case so far. The general public already has the experience of the State Bank to show how public purpose and security, as well as good return to depositors, can be combined. The Ordinance “has also provided for the adequate protection of the interests of employees of the banks concerned. They have now become employees of a publicly owned and socially responsible banking system. This also places on them special responsibility towards the Community. The success of the programme of nationalization will, in a large measure, depend upon the efficiency, the devotion and the dedication with which they perform their daily tasks, and the courtesy and consideration with which they treat the constituents of the bank. I hope that all individual employees of these banks and their associations will now help in the successful implementation of the step which has been taken. The Ordinance provides for a scheme of fair compensation for the take-over in accordance with a formula which Parliament approved recently, while enacting the Banking Laws (Amendment) Act, 1968. The Ordinance provides that compensation will be payable in the form of Government securities. In order to cause the least possible dislocation in the working of the banks covered by the Ordinance, and to avoid inconvenience to the public, it is proposed, for the present, to retain the identity of each bank in the form of a new corporation. The Chief Executive of each bank is now the custodian of the unit concerned on behalf of the Central Government, and will be subject to its control and direction. The old Board of Directors in each case stands dissolved, and the Ordinance vests the Government with the power to set up Advisory Boards in their place. These are interim measures. Changes in the structure of management may also be necessary; these will be undertaken after the most careful consideration. The Ordinance provides for such changes to be made. As in other matters of policy, Government have been guided in taking the present decision entirely by national interests, and the needs and aspirations of our people. The establishment of a socialist society is one of our declared goals, but we have not been guided by any doctrinaire considerations. Our sole concern has been to accelerate development and thus make a significant impact on the problems of poverty and unemployment, and to bring about progressive reduction of disparities between the rich and the poor sections of our people, and between the relatively advanced and backward areas of our country. I realize that the test of the decision is in its effective implementation. Government are determined to take all possible steps to make this measure a success. I should like to take this opportunity, Sir, to appeal to all sections of this House to extend their valuable cooperation in the purposeful implementation of this important measure. (Parliament Speech)[1] |
The explanation is very clear, and strong and shows her determination for development and upliftment of the society. She nationalized 6 more banks in 1980. The Objectives and achievements of nationalisation in 25 years are,
Objectives of Nationalization in Brief
Nationalization aimed to raise public confidence in the banking system, reduce regional inequality, and expand the banking network with focus on rural and sub–urban areas. The brief objectives were:
- Wider territorial and regional spread of the branch network
- Better mobilization of Financial savings through Bank Deposits
- Reorientation of Credit Deployment in favour of small and disadvantaged classes all along the production spectrum.
- Credit to the priority sectors, like agriculture, small industries and traders.
- Removal of control by a few business houses
- The conferring of a professional bent to bank management
- The provision of adequate training and reasonable terms of service for Bank Staff
Were the objectives fulfilled?
To what extent have the original objectives of nationalization been fulfilled?
These objectives backed with policy directives for lending practices positively impacted the economy and credit pattern. Two decades after the nationalization, by 1991-92, data show that the rural credit especially small credit increased, the number of branches increased, more in rural semi-urban areas, and Credit Deposit Ratio (CDR) improved across different regions including the backward states, Priority Sector Lending (PSL) ensured credit for core sectors like agriculture and the Lead Bank Scheme helped planned credit disbursal in every district. The banking sector also provides an opportunity for employment and as a public institution is mandated to implement reservation policies. The PSBs employ over 7.8 Lakh people and implement reservation policy promptly.
Above all, it reduced the income inequality across the country. In 1990, earnings of the top 1% came down from 21% in 1940 to 6%. The bottom 51% grew faster (Finance Matters, June 2020). Now it has gone up again for the rich.
India Social Development Report 2018 data on wealth
1950 1983 2006 2014 2017
Top 10% 40% 30% 48% 55% 80.7%
Bottom 50% 19% 24% 21% 15% 2.8%
The data analysis has been discontinued thereafter.
But after 23 years, from 1991-92, the Neoliberal, capitalist, and monopoly-oriented growth path has reversed the benefits of Nationalisation.
- From 27 public sector Banks, we have only 12 now (due to merger)
- From 196 Regional Rural Banks, we have only 43.
- The Government promoted Private Banks whose number has reached 21 now. The biggest among them, HDFC Bank was originally 100% Government-owned Housing Development Finance Corporation.
ICICI Bank was a 100% Government-owned industrial credit and investment corporation in India. Axis Bank was a 100% Government owned Unit Trust of India which was converted into UTI Bank and renamed as Axis Bank.
In all the three foreign shareholdings is more than the Indian shareholding.
The Global Trust Bank which was a poster boy after the Government allowed new Private Banks again, failed.
How the objectives of Nationalisation have been almost reversed through dubiously drafted policies after 1991 and accelerated after 2014?
Wider territorial and regional spread of the branch Network.
As per RBI guidelines, a rural area is defined as an area with less than 10000 population and Semi-Urban area is less than one lakh population as per Census 2011.
The North East is underbanked. South is far ahead. Rural branches have come down from 58% to 33%. Metro branches have increased from 9% to 20%. Only 25% of the total loans were given in rural areas in 2024. Metro branches have 36% of the total loan accounts and 59% of the amount. There is a clear urban bias. Moreover, only 40 crore loan accounts are there, leaving 100 crore to the money lenders. If we leave 20 Crore accounts as ineligible due to age, 80 crore or two third of the people do not have access to credit.
So the objectives have been quietly forgotten.
Better mobilization of financial savings through Bank deposits
Mrs. Gandhi assured a reasonable return from the deposits. However, the Rate of Interest on the savings bank account balance has come down from 5% to 2%. The current accounts of even Charitable Trusts, Societies and NGOs do not earn interest and the interest rates on fixed deposits have on an average reduced from 13% to 6.5%. People are forced to indirectly deposit their money in Non-Banking Financial Companies, Stock Market, Mutual Funds, Nidhis and Private chit funds. So just the opposite is happening. Read more here.
Reorientation of credit Deployment in favour of small and disadvantaged classes all along the production spectrum.
In 1991, 94.9% of the loan accounts and 22% of the loan outstanding was less than Rs. 25000. 1.8% of the accounts were above Rs.25000 and less than Rs.50000 and the outstanding was 2.9%, 1.6% of the accounts and 2.9% of the outstanding was below Rs. 1 lakhs. 0.9% of the accounts and 5.3% of the amount was less than Rs. 2 lakhs. So 99.2% of the loan accounts were up to or less than Rs. 2 lakhs and the amount outstanding was 35.9% of the loans in the entire banking industry (except Cooperative Banks)
Now, as of March 2024, only 16% of the loans are less than Rs. 25000 and the amount outstanding is 0.3%. 57.3% of the accounts are less than Rs. 2 Lakhs and the amount outstanding is 7.7%. In total 77.3% of the accounts and 8% of the loans are really small loans up to Rs 2 lakhs. The poor people are directed to Non-Banking Financial Institutions and Micro Finance Institutions or the modern day money Lenders who charge up to 36% interest. In some cases, it is even more. But 449 big borrowers with loans outstanding more than Rs. 100 crore have availed loans at less than 5% interest and 10,838 big borrowers have availed loans at less than 10% interest (5,6,7,8,9%).
Credit to priority Sectors like Agriculture, Small industries and traders
The priority sector norms have been diluted which has led to banks catering to large borrowers. Even norms for Farmers’ Credit have been diluted favouring big borrowers. SSI, Village Industries, Artisans and even MSMEs are suffering. Instead of giving Priority Sector loans, banks can either deposit the shortfall in NABARD’s Rural Infrastructure Development Fund or buy Priority Sector Lending Certificates from other Banks like RRBs to meet the shortfall. It is so disturbing that the Reserve Bank of India itself has removed statistics on Loans to Artisans and Village Industries and loans to SSI from its BSR Data indicating that they don’t care for the poor, downtrodden people
Instead of directing credit to the disadvantaged, it’s directing loans to the rich and the super-rich.
No limits on a few business houses
Now Ambani has Jio Payment Bank in collaboration with SBI, Adani has Adani Capital which has a co-lending agreement with SBI and many corporates have their own Non- Banking Financial Companies. They have become the modern-day money lenders to whom, the Banks are giving cheap credit and they exploit the poor and middle class with huge interest, service charges and violent methods of recovery.
The business houses get the cheapest credit but others pay more.
The Conferring of a professional bent to the Bank Management
The Bank’s Boards have no officer director or employee director who played a crucial role and also were watchdogs. We have seen how the SBI chairman was pressurized in the Electoral Bonds Case. The Finance Ministry holds Gyan Sangam, Vichar Manthan and other meetings every year to give directions which are totally opposite to the goals of Nationalisation. The finance minister personally conducts meetings with all chairmen and MDs of Banks and gives directions almost every quarter. She behaves more as an individual owner of the Banks and her directives are followed. The Boards are filled with Independent Directors, who are fully dependent on the ruling party and the RBI and Finance Ministry Nominees dominate without any accountability.
MNC Consultants like BCG, McKinsey and Deloitte tell bank management what is to be done, which is not at all suitable to our country.
The provision of adequate training and reasonable terms of service for Bank staff.
Training system varies from bank to bank. SBI has an excellent system but the Career Development System prescribed by BCG has become a Career Destruction System. Other Banks have to develop better training systems. Often they use outsiders who speak theories without knowing practical problems.
The terms of service, though quite good after the recent Bipartite, are still inferior to Central Government officers and employees. Their demand for A five-day week is still pending with the only decision-making body of the Government, the PMO.
In addition to all these, the FM and the PM who have praised banks and bank employees are bent upon privatising banks starting with the IDBI bank which was recently saved by LIC. They have already announced the privatisation of two banks but names are not announced yet.
What is needed after 55 years is making public sector banks actually public by increasing interest rate on deposits without which banks will collapse. Increase small credit to the real priority sector, double the staff strength in banks and nationalise private banks, Non- Banking Finance companies and Micro Finance Institutions.
I am glad that the All India Bank Officers Confederation has decided to launch a people’s campaign for Fair Interest Rates and better services to the majority population. The others should join en masse.
If not, one day we will regret it.
“The Ultimate tragedy is not the oppression and cruelty by the bad people but the silence over that by the good people”- Martin Luther King.
Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.
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