Impact of nationalisation on indian banking industry
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The Indian government's decision to nationalize 14 commercial banks in 1969 is a very controversial topic and you can find both avid supporters and opponents on the issue. I personally am pretty neutral about the whole issue, as I see some good effects as well as some not-so-good ones. Here's my take.
India adopted a mixed economic model post freedom with a socialist pattern, in view of the largely poor and agrarian population. The banking sector was very primary and limited to urban areas, educated people, and the financially higher classes. The average rural Indian still relied on the local money lender and faced exploitation through high-interest rates, stringent mortgage rules, and sometimes, even slavery. Private banks, which essentially prioritized profit, did not venture beyond urban and high-class markets.
The basic idea beyond nationalization was to widen the population's access to banking and financial facilities. The following are the effects of this move.
1. Spread of banking across the country.
As expected, banks and their branches spread into semi-urban and rural areas at a huge rate. "According to bank economists, during the last 28 years of nationalization, the branches of the public sector banks rose 800 percent from 7,219 to 57,000, with deposits and advances taking a huge jump by 11,000 percent and 9,000 percent to Rs 5,035.96 billion and Rs 2,765.3 billion respectively." The rural classes, farmers especially, found a viable alternative to the money lenders who had been exploiting them.
2. Trust of the people.
The typical Indian mentality, even though insecure about its politicians, puts great faith in the "maai-baap sarkar" (literally, 'parent government') and hence finds nationalized banks as the best protectors of its money, enabling more and more people to avail of numerous banking facilities, financial education and significantly lesser interests rates on loans than those charged by money lenders and private banks.
3. Strength to the economy.
The tendency to save, the inclination towards controlled spending, and the trust in government-controlled banks led to good savings at the national level. According to P Chidambaram, the finance minister of the UPA-led government nationalized banks were the reason that India recovered from the 2007 financial crisis faster than other economies of the world.
4. Negative effects.
The negative effects of nationalization are more or less similar to those of bringing any industry into the public sector- lack of internal control and efficiency, less competitive, less efficient recruitment and development of human resources and huge losses due to poor management as well as (comparatively) welfare-oriented approach are widely seen. Also, the goals of roping the rural segments, and farmers especially, into the banking fold and providing them with effective financial solutions have not been met to the desired extent.
India adopted a mixed economic model post freedom with a socialist pattern, in view of the largely poor and agrarian population. The banking sector was very primary and limited to urban areas, educated people, and the financially higher classes. The average rural Indian still relied on the local money lender and faced exploitation through high-interest rates, stringent mortgage rules, and sometimes, even slavery. Private banks, which essentially prioritized profit, did not venture beyond urban and high-class markets.
The basic idea beyond nationalization was to widen the population's access to banking and financial facilities. The following are the effects of this move.
1. Spread of banking across the country.
As expected, banks and their branches spread into semi-urban and rural areas at a huge rate. "According to bank economists, during the last 28 years of nationalization, the branches of the public sector banks rose 800 percent from 7,219 to 57,000, with deposits and advances taking a huge jump by 11,000 percent and 9,000 percent to Rs 5,035.96 billion and Rs 2,765.3 billion respectively." The rural classes, farmers especially, found a viable alternative to the money lenders who had been exploiting them.
2. Trust of the people.
The typical Indian mentality, even though insecure about its politicians, puts great faith in the "maai-baap sarkar" (literally, 'parent government') and hence finds nationalized banks as the best protectors of its money, enabling more and more people to avail of numerous banking facilities, financial education and significantly lesser interests rates on loans than those charged by money lenders and private banks.
3. Strength to the economy.
The tendency to save, the inclination towards controlled spending, and the trust in government-controlled banks led to good savings at the national level. According to P Chidambaram, the finance minister of the UPA-led government nationalized banks were the reason that India recovered from the 2007 financial crisis faster than other economies of the world.
4. Negative effects.
The negative effects of nationalization are more or less similar to those of bringing any industry into the public sector- lack of internal control and efficiency, less competitive, less efficient recruitment and development of human resources and huge losses due to poor management as well as (comparatively) welfare-oriented approach are widely seen. Also, the goals of roping the rural segments, and farmers especially, into the banking fold and providing them with effective financial solutions have not been met to the desired extent.
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