50 years of bank nationalisation led to growth in deposits, branches and credit

Nationalised banks have played a key role in expanding credit and extending to both the private sector and Agriculture. It is unfair to play down their contribution to the economy

50 years of bank nationalisation led to growth in deposits, branches and credit

Rahul Pandey

Cinema reflects the realities of its times. Sukhi Lala, the creepy money-lender in Mother India, which was released in 1957, reflected money lenders of the time, who sucked the last penny out of distressed farmers with astronomical interest rates. Indira Gandhi’s move to nationalise banks was an attack on the Sukhi Lalas of the time.

Fifty years later, our banking system is within reach of every Indian. We now have close to 1.5 lakh bank branches across the country and while we may take banking operations for granted and perhaps even bicker about the quality of service in our nationalised banks, we need to understand the impact it has on our developmental story. More importantly, the importance of the move has to be evaluated in the context of the 1960s, when India was recovering from the years of colonial plunder.

Access to funds is central and critical for development, both for the farmer and the entrepreneurs. Lack of access to funds not only restricts growth, it also excludes people from the overall development process. Without formal credit, farmers and entrepreneurs are not only forced to pay higher rates of interests, financially deprived sections would never have access to loans and reasonable rates.

Indira Gandhi transformed the banking sector to build greater financial inclusion and for enabling many Indians the access to funds without the fear of being exploited. India has adapted with changing times to ensure that our financial sector not only remains competitive but also fulfils its social responsibilities.

The growth story of India’s banking system is nothing short of extra-ordinary.

When we gained independence, our banking system had a total of 96 reporting banks with a total cash deposit of Rs 43.43 crore. The government sector had to play a big role in ensuring a stronger banking sector which is why the State Bank of India was nationalised in 1955 and its subsidiaries were also brought into the public sector in 1959.

The Indian banking sector, however, was not able to keep pace with the growing needs of the Indian economy, more so the agricultural sector which needed easier access to funds. In the absence of credit, the farmers were completely dependent on the moneylenders for agricultural credit. The condition of our traders and entrepreneurs was similar as they too were dependent on the informal sector for their financial needs.

Data from the Reserve Bank of India shows that the country had a total of 89 commercial banks which had a total of 8,262 branches of which 1,833 (only 22%) were in rural areas. Smt. Indira Gandhi, the then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Committee meeting in a paper entitled 'Stray thoughts on Bank Nationalisation'.

The Congress was committed to greater financial inclusion which led to the nationalisation of 14 banks in July 1969. These banks, which accounted for almost deposits in the banking sector, expanded rapidly in the years that followed.

A decade later, in 1979, the total number of branches of these banks increased more than three-fold; from 8,262 in 1969 to 30,202 in 1979. Access to banking facilities in the rural areas also improved dramatically due to a seven-fold increase in rural branches; from 1,833 in 1969 to 13,337 branches in 1979. Rural branches now made about 44% of the total branches against 22% a decade ago.

The overall credit given by the banks also expanded rapidly during this period as it went from Rs 3,599 crore in 1969 to Rs 19,116 crore in 1979. A large part of this credit was now finding its way to farmers and small entrepreneurs who had big dreams for themselves and their country.

The nationalisation of banks opened a new development paradigm for the financially excluded population of the country. It also laid the foundations of the Green and the White Revolution in the country as the farm sector had access to formal banking, the first step to economic growth.

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