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Saturday, 18 July 2015

14 Top Banks are Nationalised on 19th July, 1969 - From class banking to mass banking

The decision by the central government to nationalise 14 private sector banks in July 1969 is often cited as a defining moment for India. Arguably the most important economic decision taken by any Indian government since 1947, its impact – political, social and economic – is something that even the reforms of 1991 cannot compare to. In fact, it was because of this decision that Indian banks emerged relatively unharmed from the recent global financial crisis.

The road to this social control of banks, however, wasn’t constructed overnight. Although the idea of social control of banks emerged in 1967, the Economic Programme Committee of the All India Congress Committee (AICC) in its report in 1948 had already strongly recommended that banking and insuranceshould be nationalised as part of a total package for establishing “a just social order”. The matter, however, rested for a decade and a half until the political climate called for it.

The reasons behind this decision, by the then Prime Minister Indira Gandhi, were dictated both by economics and politics. In January 1966, when Indira Gandhi ascended to power with the help of the ‘Syndicate’ of older and more established Congress leaders (K. Kamaraj, S. Nijalingappa, Nilam Sanjiva Reddy, Atulya Ghosh, Srinivas Mallya, S. K. Patil among others), India was besieged by several problems.

Severe droughts had brought down the crop yield, prices had shot up by 16% and US food aid was heavily dictated by geopolitics. A foreign exchange crisis was brewing with the International Monetary Fund (IMF) demanding that India devalue its currency. On a separate front, the country flared up with identity politics in Punjab and Haryana, inter-state feuds between Karnataka and Maharashtra over the newly independent Goa, anti-Hindi agitation in Tamil Nadu and tribal troubles threatening peace in the north eastern states 
 
Plagued by these and many more troubles, Indira Gandhi resented the control of the Syndicate as well. This required her to assert her leadership to restore the authority of her government, rebuild the Congress, revitalise nation’s hope and put her firmly in control. Mrs. Gandhi chose ‘vote with the support of poorest’ as her objective and the nationalisation of banks was her instrument. Her move to wreck the Syndicate resulted in a split in the Congress party, forcing her to prove majority in the Parliament. She aligned with Left parties commanding 42 seats in the House of 520. Subsequently, at the Bangalore AICC session in 1969, Indira Gandhi expressed her intention of nationalising the private sector banks in a paper titled, “Stray thoughts on Bank Nationalisation”. The paper received an overwhelming support from the public.

On her return from Bangalore, Indira summoned I. G. Patel (the then secretary in the Ministry of Finance) and asked him to prepare an ordinance for the nationalisation of banks. Both, the then Union Finance Minister Morarji Desai and the then RBI Governor L. K. Jha, had no hint about the move. Later that year in July, Desai was divested of the Finance portfolio after he voiced his disagreement with the idea that Indira Gandhi was promoting. After announcing the decision to nationalise the 14 banks, Indira Gandhi herself took over the Finance portfolio, thereby making it difficult for Morarji Desai to remain in the Cabinet. When he expressed his strong resentment at her action, she told him he could continue in the Cabinet as Deputy Prime Minister and hold charge of some other portfolio. Describing it as “an amazing proposal and a very clever move”, Desai conveyed his inability to continue in the Cabinet. Patel along with Jha, and RBI Executive Director R. K. Seshadri worked on the ordinance for bank nationalisation. And the ordinance was passed without any murmur.

On July 19, 1969, the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance was promulgated by acting President V. V. Giri that resulted in the transfer in the ownership of 14 largest commercial banks to the State. These included the Central Bank of India, Bank of India, Punjab National Bank, Bank of Baroda, United Commercial Bank, Canara Bank, Dena Bank, United Bank, Syndicate Bank, Allahabad Bank, Indian Bank, Bank of Maharashtra, Indian Overseas Bank and Union Bank. At that time these 14 banks controlled 70% of the nation’s deposits. 
          
 
Soon after the decision, Minoo Masani, a lawyer, freedom fighter and founding member of the Swatantra Party, filed a writ petition in the Supreme Court against the move. In February 1970, the Supreme Court upheld the legislative competence of the Parliament in the acquisition but struck down nationalisation. A new ordinance was drafted that set out new levels of compensation and all 14 banks were paid Rs.874 million in all.

Prior to the nationalisation in 1969, most private banks were linked to industrial houses – United Commercial Bank to Birla firms, the Oriental Bank of Commerce to the Thapar group and the Central Bank of India to the Tatas. It was this control that Indira Gandhi changed with one stroke.

If the move yielded political dividends to Indira Gandhi, it showered equal economic benefits on India as well. 22 years after India’s independence, the Indian banking system had less than 7,000 branches. But just one decade after the nationalisation of banks the count shot up to 30,202 in 1979, and to an impressive 57,699 branches in 1989. Even the presence of banks in rural India improved dramatically from 1,833 banks in 1969 to 33,014 branches in 1989. Indira Gandhi’s biographer Inder Malhotra recalls the jubilation on New Delhi’s streets when banks were nationalised. “Rickshaw pullers and people who had never seen the inside of a bank were cheering,” he recalls. “I asked them why and they replied: at least someone is thinking of the poor.” Garibi hatao was Indira Gandhi’s war cry for elections in 1971. When the results were declared, she had swept 325 of the 518 seats in Parliament.

Six years later India achieved GDP growth of 9% (in 1975) on the back of nationalisation of banks and in turn opening of a large number of branches in the rural areas. “This was largely possible due to banks’ nationalisation efforts of (late prime minister) Indira Gandhi,” says former Chief Economic Advisor Dr. Kaushik Basu. “1975 was a good year for India’s economic growth as a large number of bank branches were opened in rural areas and India achieved savings & investment rate of 13% (of GDP),” he adds. Agrees C. H. Venkatachalam, General Secretary of the All India Bank Employees Association, as he tells B&E “Indian banks started reaching every household. They were finally on the right track.” 
 
Indira Gandhi not only used the decision of nationalisation of banks as a plank to paint her rivals (the Syndicate) as anti-poor, but also as an opportunity to campaign for V. V. Giri, who was later elected as the President of India defeating Sanjiva Reddy. Political benefits, though, were shortlived as India engaged in the liberation of Bangladesh followed by a “Total Revolution” call by Ram Manohar Lohia resulting in an Emergency being declared by Indira Gandhi and her subsequent defeat in the 1977 General Elections. On her return to power in 1980, the then RBI Governor I. G. Patel impressed upon her for a second round of reforms in the form of nationalisation as some banks were running as personal fiefdom. On April 15, 1980, the Central government further nationalised Andhra Bank, Corporation Bank, New Bank of India, Vijaya Bank, Oriental Bank of Commerce, and Punjab & Sind Bank. The second round of nationalisation was promulgated in 1980 by none other than President Nilam Sanjiva Reddy whose candidature for the office of President triggered the split in the Congress party during late 60s as the Syndicate led by Kamaraj preferred him over Indira Gandhi’s candidate Jagjivan Ram.

In the Reserve Bank of India Volume 3 (1967-1981) veteran journalist Inder Malhotra recalls a conversation between India’s cultural czarina and a close friend of Indira Gandhi, Pupul Jayakar who complimented her on the decision to nationalise the banks. “Mrs. Gandhi is reported to have told her that the timing was not chosen by her but by her adversaries. ‘They drove me to the wall and left me with no other option. 


Over four decades later, the ruling Congress party continues to bask in the legacy of Indira Gandhi and her crucial decision to nationalise banks. Former Finance Minister Pranab Mukherjee in his 2009 Budget speech credited this historic decision for saving India from global financial crisis in 2007. “Never before has Indira Gandhi’s bold decision to nationalise our banking system exactly 40 years ago – on July 14, 1969 – appeared as wise and visionary as it has over the past few months,” Mukherjee said. The government is now in plans for another wave of banking reforms. Political opponents, however, are at odds. “The Manmohan Singh government has undone what the Indira Gandhi government did,” says Prakash Karat, General Secretary of the Communist Party of India (Marxist). “The Bank Nationalisation Act nationalised all the major private banks in 1969. Many of these banks were linked to industrial houses. The 2012 amendment to the banking laws paves the way for the entry of corporate houses into banking. Thus, the wheel has turned full circle,” he adds referring to the passage of the Banking Laws (Amendment) Bill in the winter session of parliament in 2012. The UPA government is pushing ahead with banking reforms which means more privatisation and financialisation of the banking system, alleges Karat. “The American pattern of ‘innovative financing’ through different kind of derivatives, including credit derivatives, have been introduced in the banking system. In short, every practice in banking which led to the financial crisis and instability in 2008 in the West is being introduced in India in the name of financial sector liberalisation,” he says.

Over four decades after banks were nationalised, the benefits of this measure are yet to be fully realised. Several committees and study teams have examined the working of the banking sector. But the Government has been unable and unwilling to implement most of their recommendations. In its report in 1991, the Narasimham Committee pointed out several deficiencies in banking. “Management weaknesses and trade union pressures have seriously undermined the efficiency of banks and financial institutions,” it noted, while also mentioning “lack of sufficient delegation of authority, inadequate internal control in respect of balancing of books and reconciliation of inter-branch and inter-bank entries.” The Committee asserted that banks had ceased to be competitive and innovative.

Although India has managed to survive the brunt of the recent global economic crisis, it won’t anymore unless and until the new-age government reforms head in the right direction. With several banks celebrating 100 years of existence, this increasingly complex and sophisticated financial system calls for new concepts of management, professional decision-making and modernisation, and above all a genuine political will! 
 
          

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