In accordance with the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and 1980, a policy of nationalization of banks was brought about India. On its 50th anniversary, Niranjan Rajadhyaksha stated in his opinion piece that “The second volume of the official history of the Reserve Bank of India describes bank nationalization as the single-most-important economic policy decision taken by any government after 1947. Central bank historians say that in terms of the impact, even the economic reforms of 1991 pale in comparison …Bank nationalization succeeded in specific areas such as financial deepening because of the rapid spread of branches, but it eventually did more harm than good.”
Consequently, this piece tries to discuss the positive as well as the negative impact of nationalization, while trying to justify which effect outweighs the other.
Positive impact of nationalization
If the banking sector is completely privatized, it would run like any other company for the purpose of gaining profits. Nationalization of banks prevents a monology in the banking sector and prevents exploitation by the private or the foreign banks.[1] It further prevents banks from neglecting rural and less profit sectors and facilitates access of the entire population to the banks. This helps in the growth and development of all sectors in the economy. It further ensures proper regulation of the banking sector with a stringent checks and balance mechanism. Moreover, a centralized system helps maintaining some level of uniformity and stability of services to all localities and areas in the nation. Furthermore, state ownership of banks mitigates unhealthy competition which in turn affects public interest and experience with the banking sector. [2]
Negative impact of nationalization
Politics plays a massive role in determining the economic growth of a nation. When nationalization of banks is done, these institutions are wholly under the control and management of the state. This may sometimes cause misallocation of resources owing to misgovernance or corruption. It further leads to lack of accountability and a bureaucratic outlook to the banking sector leading to inefficiency or low productivity in comparison to private banks. Further, state owned are generally poorly managed due to lack of any competition. They generally do not even invest much in new technology and innovation, leading to lack of development and growth in the banking sector.[3]
The positive impact outweighs the negative
Although it is seen that nationalization does lead to certain unwanted outcomes and situations however, complete privatization would be extremely detrimental to the growth of the rural sector and the Indian economy as a whole. Without such degree of centralization, the public interest will not be safe-guarded, the private and foreign banks would function on a profit principal, and would exploit the system to a point of no revival. Moreover, without such uniformity it would be extremely difficult to regulate the system. Therefore, it is believed that complete privatization is not the solution. Rather, having some state-owned banks function together with private banks in the country would keep the bureaucratic attitude in check, bring in reforms in the system, ensure abundant competition and help in innovation, technological growth and efficiency. This would also increase accountability ensuring that the system does not become corrupt and misgoverned. The same principle was applied in 1991 by the then Finance Minister Manmohan, with the help of the then RBI governor C. Rangarajan, and private banks were introduced for the first time in the Indian banking system.[4]
[1] Chukwuemeka, Edeh Samuel. “Advantages and Disadvantages of Nationalization.” Bscholarly, 12 Aug. 2020, https://bscholarly.com/advantages-and-disadvantages-of-nationalization/.
[2] Maitra, Sulagna. “10 Ways in Which Bank Nationalisation Benefited the Country since 1969.” National Herald, 19 July 2019, https://www.nationalheraldindia.com/national/50-years-of-nationalisation-of-banks-here-are-10-ways-the-country-benefited.
[3] Chukwuemeka, Edeh Samuel. “Advantages and Disadvantages of Nationalization.” Bscholarly, 12 Aug. 2020, https://bscholarly.com/advantages-and-disadvantages-of-nationalization/.
[4] Ranjan, MC Goverdhana. “25 Years of Reforms: Meet Indian Banking Sector’s Poster Boys of Liberalisation.” The Economic Times, 2016, https://economictimes.indiatimes.com/industry/banking/finance/banking/25-years-of-reforms-meet-indian-banking-sectors-poster-boys-of-liberalisation/articleshow/53406316.cms.
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