The Nationalisation of Banks

Summary

• Definition: The process of transferring ownership and management of commercial banks from private shareholders to the Government of India.
• Timeline: * 1955: Imperial Bank became State Bank of India (SBI).
  • 1969: 14 major banks nationalized (the “Big Bang” move).
  • 1980: 6 more banks nationalized.
• Objective: Shifting the focus from “Class Banking” to “Mass Banking” to ensure credit reaches agriculture and small-scale industries.
• Impact: Dramatically increased rural branch expansion and helped fund India’s Green Revolution and Five-Year Plans.

The Three Phases of Nationalisation

The transition of India’s banking sector happened in stages, each aimed at increasing the state’s grip on the financial “commanding heights.”

Phase	Year	Action	Context/Criteria
Phase I	1955	Creation of SBI	Based on the All India Rural Credit Survey Committee report.
Phase II	1969	14 Banks Nationalised	Banks with deposits > ₹50 crore; covered ~85% of total deposits.
Phase III	1980	6 Banks Nationalised	To further control the flow of credit during the 6th Five-Year Plan.

Why Nationalise? (The Socio-Economic Drivers)

Before 1969, private banks were often linked to large industrial houses. This led to “connected lending,” where banks funneled public deposits back into the businesses of their owners, neglecting the rest of the country.

• Rural Neglect: In 1969, there were only about 8,000 bank branches in India, almost all in urban centers. Nationalisation forced banks to open branches in unbanked rural areas.
• Priority Sector Lending (PSL): It allowed the government to mandate that a percentage of loans go to “Priority Sectors” like Agriculture and MSMEs.
• Resource Mobilization: By owning the banks, the government could utilize public savings to fund infrastructure and poverty alleviation programs through the Statutory Liquidity Ratio (SLR).

Key Legal & Political Highlights

• The Ordinance: The 1969 move was so sudden it was done via an Ordinance just two days before a Parliament session, bypassing potential lobbying from bankers.
• The “Rustom Cavasjee Cooper” Case: The Supreme Court initially struck down the move on the grounds of inadequate compensation. The government responded by amending the Constitution (25th Amendment) to clarify that “compensation” didn’t necessarily mean market value.
• Exclusion of Foreign Banks: Foreign banks were excluded to avoid international legal friction and to maintain a channel for foreign trade and exchange.

Modern Perspective: Nationalisation vs. Privatisation

While nationalisation achieved “Mass Banking,” it eventually led to challenges like high Non-Performing Assets (NPAs) and operational inefficiencies due to political interference.

• Narasimham Committee (1991): Suggested reducing government control, leading to the entry of new private banks (like HDFC and ICICI).
• Current Trend: The government is now moving toward consolidation (merging 27 PSBs into 12) and has announced plans for the privatisation of select Public Sector Banks (PSBs) to improve efficiency.

Multiple Choice Questions (MCQs)

Q1. Under whose Prime Ministership was the major wave of nationalising 14 banks carried out in 1969?

A) Lal Bahadur Shastri

B) Indira Gandhi

C) Morarji Desai

D) Jawaharlal Nehru

Q2. What was the specific deposit threshold set for the 14 banks nationalised in 1969?

A) ₹10 crore

B) ₹50 crore

C) ₹100 crore

D) ₹200 crore

Q3. Which bank was formed in 1955 after the nationalisation of the Imperial Bank of India?

A) Punjab National Bank

B) Bank of Baroda

C) State Bank of India

D) Central Bank of India

Q4. One of the primary goals of bank nationalisation was to promote “Priority Sector Lending.” Which of these is a typical priority sector?

A) Luxury Real Estate

B) Agriculture

C) Foreign Stock Markets

D) Heavy Metal Mining

Q5. Why were foreign-owned banks excluded from the 1969 nationalisation process?

A) They had no deposits in India.

B) To avoid international legal complications and maintain foreign trade channels.

C) They were already owned by the Indian government.

D) They were too small to be considered.

Answers:

Q1: B | Q2: B | Q3: C | Q4: B | Q5: B