Nationalisation of banks - historical blunder or the need of the hour?

Nationalisation of banks - historical blunder or the need of the hour?


The nationalisation of banks in 1960 under Indira Gandhi Government was considered as the need of the hour. When 14 banks were nationalised, it was seen as an attempt to shift power from private industries towards the central government who could concentrate better on improving the lives of the poor, illiterates and the unemployed masses those days. However, according to present Chief Economic Advisor Arvind Subramanian, nationalisation of banks was the biggest economic blunder ever made by Indira Gandhi.

These were Subramanian's exact words: "Bank nationalisation in India was a huge historical mistake. We feel recapitalisation strategy should differentiate between banks. We feel one size fits all strategy doesn't work for banks. While we need to shrink some bank we also need to diversify and give more licences." Is the Chief Economic Advisor right in his accusation to the historical milestone decision?

Historical blunder:

1. Political interference increased as banks went into the hands of the central government. Banking started loosing efficiency as they were least concerned about profitability. Banking became more and more unprofessional and unethical under the government. Employees of the government, inexperienced, lazy as ever, and less qualified took charge which proved to be far less productive for the banks as compared to their privatized period.

2. More political interferences caused financial indiscipline in the lending schemes which resulted in heavy losses for the banks. Earlier under private sector, run by big businesses houses, the investment was made largely for the benefits of their own ventures and hence the bank was doing a commendable business. These businesses houses could have prospered even more if banks were not nationalised. More profits would have meant better development of industries which is now the objective of the present government. If these banks would have done good business so far, those that credited to the banks would also have benefited more.

3. Corrupt practices began taking over the efficient functioning of the banks. The government officers had the power to sanction advances and loans. Huge NPA (Non Performing Assets) was seen soon after nationalisation of banks for they were always busy in arranging loan meals using their powers. For gathering votes, government even introduced schemes that meant loss for the banks and they were enforced regardless of unplanned consequences.

4. Employees and bank officials in nationalised banks were paid less. They had nothing to benefit even if the bank did good business. They least cared and became laid back. They eagerly became part of political strategies that involved corrupt practices and soon we had a list of top defaulters roaming free.

Need of the hour:

1. Nationalisation of banks in 1960 was not just a measure for economic stability but more for social stability in a country that had just earned its independence and was clueless about what future held for them. Banks were run under big business houses that used the profits to further enhance their own businesses. Equal distribution of monetary resources was only possible when banks worked for the public sector which was then called priority sector.

2. Banks started functioning in favour of the common masses only when government took over and ensured that profit would not matter more than benefits to the poor and illiterates. Yes, the productivity reduced but schemes were implemented in favour of the common people who were in need to funds for a fresh start towards better life after independence.

3. Agriculture and other small scale cottage industries, village industries needed funds for growth which could only be accessed when banks worked under the government. Moreover, banks were concentrated only in the urban areas. Rural and other remote areas did not get any access to banking network which was made possible only after banking was nationalised. Private banks would have functioned (some still do) only in areas of their interests which was in and around developed or developing cities.

4. Exploitation of the inferiors by the superiors still continued after independence. Even if funds were released by the government for providing aid to the needy they would not be distributed equally without banks functioning under the government. When banks were nationalised common people started having trust in the banking system. They found it more reliable and came out of the fear of being exploited and cheated by the superiors.

5. Poor and needy could have access to financial help from the government under various schemes like Integrated Rural Development Program (IRDP), Self Employment for Urban Poor (SEPUP), Self Employment for Educated Unemployed Youth(SEEUY) etc with subsidies ranging from 25 to 50% of the loan amounts, and even at the lowest rates of 4% interest under Differential Rates of Interest (DRI) scheme. Youth could avail education loans for higher studies at institutes where education was affordable only for the wealthy.


The nationalisation of banks was an initiative for socialisation more than economic growth of the country. It did attain the objective of its creation. Now banking is possible in all remote locations of the country. The Prime Minister's Jan-dhan yojya would not have been possible with private banking sector. The earliest of nationalisation process did have loopholes from where entered corruption and malpractices but the Economic Reforms of 1991 filled the loophole for the better. Now we can proudly say that Indian banking industry is way ahead, all ready with a competitive spirit, staffed with efficient functioning and directed towards more productivity. Banking has become more professional and ethical and nationalisation seems to have evolved to a stage from where we can look forward.
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  • RE: Nationalisation of banks - historical blunder or the need of the hour? -Deepa Kaushik (07/29/15)
  • Nationalisation of banks might have been the need of the hour. it could have served the economical or politiucal interest of the then politicians. But iot has served the common man to a good extent in th long run. People got free of their fear and dilemma regarding the security of their hard-earned deposits.

    Nationalization of banks definitely served the basic purpose of reaching the rural sectors of the society and getting the illiterate and ignorant sections to the platform of saving and securing their income. It has also helped the Government to implement some policies in the benefitof the poor from time-to-time.

    To help the poor and needy requires a selfless service which can never be expected in a private sector. The private sector banks would have their own interests and gains on the priority which would never reach the poor people who need more security for their money and some good efficient policies for long term deposits with assured return.

    Nationalised banks might be lagging behind the private ones in some features. The staff in the nationalised banks are not as competitive as in the private banks. But, this is not something that requires abolition of nationalised banks. we just need good incentive programs for the staff at the public sector banks which could encourage them to be far more competitive. Hence, nationalization of banks had been a profitable move for the common man so far.