New Delhi: The week gone by marked the 53rd anniversary of the day — 19 July 1969 — Prime Minister Indira Gandhi nationalised 14 major banks, which accounted for over 80 per cent of India’s bank deposits. Over half a century since the ordinance, the move still evokes sharp divisions, with some criticising it as a failure and others hailing it as a landmark decision.
Nationalisation of banks had also taken place prior to 1969. The Reserve Bank of India (RBI) was nationalised a year after Independence. The State Bank of India (SBI) came into being after the government took over the Imperial Bank of India in 1955.
Supporters of nationalisation had argued that the banking system was not very suitable for the large economically underprivileged section of the society.
In a debate in Parliament in August 1969, Congress Rajya Sabha MP Purnananda Chetia had lauded the move, saying “the nationalisation of banks is one of the landmarks in the history of the Congress administration…”
“Banking institutions are instruments which help to concentrate economic power and wealth in the hands of a few persons. So we had to nationalise these 14 major banks. If necessary, we shall have to go ahead and nationalise other banks also, if the circumstances so demand,” he said.
In 1980, the government nationalised six other banks.
But, the Indira Gandhi government faced resistance from both the opposition and the judiciary. In February 1970, the Supreme Court reversed the government’s decision with 10 of 11 judges striking down the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969, through which the state had taken over control of the 14 banks.
But Gandhi passed another ordinance soon after the apex court’s ruling. Subsequently, Parliament passed the Banking Companies (Acquisition and Transfer of Undertakings) Bill, 1970, in March that year.
Also Read: Indian economy has a twin deficit problem. To counter it, govt needs to juggle growth & stability
Privatisation a double-edged sword
In the long term, the report notes, half a century after the nationalisation in 2019, public sector banks (PSBs) accounted for gross Rs 7.4 lakh crore of NPAs (Non-Performing Assets) or 80 per cent of NPAs in the Indian banking system. The same year, the PSBs registered a collective loss of Rs 66,100 crore in contrast with the profit of Rs 42,100 crore of other scheduled commercial banks.
According to a reply from the government in the Rajya Sabha in 2021, NPAs of the PSBs increased to Rs 5.40 lakh crore in 2021 from Rs 2.24 lakh crore in 2014.
In June this year, the RBI also flagged the poor financial health of PSBs in its Financial Stability Report. “In the severe stress scenario, however, the GNPA (Gross Non-Performing Assets) ratios of PSBs may increase from 7.6 per cent in March 2022 to 10.5 per cent a year later whereas it would go up from 3.7 per cent to 5.7 per cent for PVBs (Private Sector Banks),” the report said.
GNPA refers to the sum total of all the unpaid debts given by the banks, which have missed on their principal or interest payment. The higher the GNPA, the more worrying the quality of assets of a bank.
The RBI report also said that in case the economy goes through “severe stress” due to any crisis or developments, the GNPA ratios are likely to worsen further in case of banks.
Also Read: India records best-ever mergers & acquisitions quarter, $82.3 billion pending & completed deals
Modi govt’s privatisation push
In their policy paper ‘Privatisation of Public Sector Banks in India: Why, How and How Far?’, former NITI Aayog vice-chairman Arvind Panagariya and National Council of Applied Economic Research director general Poonam Gupta noted that, “since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the largest PSB, SBI”.
Between 2010-11 and 2020-21, the government infused $65.5 billion (Rs 5.2 lakh crore) in the PSBs to fight the NPA crisis but the situation was still bad compared to the private sector.
The authors note that PSBs (including SBI) in 1991-92 had an 88.5 per cent share in the total banking assets, and private banks began with just 4.2 per cent. This number changed drastically in three decades. By 2020-21, the PSB share fell to 59.8 per cent and that of private banks rose to 32.8 per cent.
“The next question we confront is the pace of privatisation. Here our view is that the government should move as rapidly as politically feasible. The reason is that private banks are now clearly outperforming PSBs. It is quite unlikely that this trend will reverse in the coming years,” the report said, adding that the longer the government holds on to PSBs that it eventually plans to privatise, the more taxpayer money would be spent on more rounds of recapitalisation.
The Modi government has been moving towards privatisation and mergers in the banking sector. In 2016, then finance minister Arun Jaitley proposed the merger of five associate banks of SBI with the banking behemoth. In 2019, state-owned Bank of Baroda became India’s third-largest lender after a merger with Vijaya Bank and Dena Bank.
Jaitley’s successor Nirmala Sitharaman took the merger policy a step further. In one of the Modi government’s biggest reforms, Sitharaman in August 2019 announced the mega merger of 10 PSBs into four entities. She also announced the infusion of over Rs 55,000 crore in the PSBs.
While the government announced in the 2021-22 Union Budget the privatisation of two PSBs, Sitharaman said in December that the decision was pending. There are now reports that the government is planning to initiate the next round of PSB mergers, with the aim to create four-five large banks of the scale of SBI.
(Edited by Tony Rai)
Also Read: Singed by farm protests, Modi govt holds up privatisation of 2 PSU banks until state polls