How did the nationalization of private banks help India in 1969? What were the motives behind this decision?

economy : How-did-the-nationalization-of-private-banks-help-India-in-1969-What-were-the-motives-behind-this-decision?

Answer by Prasanna Venkatachari:

Banking has a long history of over 300 years in India. During the triple century of man years, the banking sector has undergone several changes in the structure for its own good.
Private banking saw its introduction in India around mid 19th century and was predominant till Independence. Commercial banks were under private sectors and were more businessmen friendly. It lacked the tenacity to serve the poorer section of the spectrum majorly from agro and allied-agro contingent. Agriculture was the back bone of Indian economy and lack of financial empathy towards them was deemed reckless and thus a reform was required.

Central Bank’s (Now RBI) new found broader regulatory authorization over commercial banks post independence meant it could go for the necessary changes in the norms. As a part of the economic development plan, Indian government nationalized 14 commercial banks in the year 1969.

How it helped?
Monopoly Check – Nationalization meant the larger portion of private controlled banks would be controlled by the state and funds reached who were actually in need.

Financial accessibility – Another primary agenda was to take the banking into rural areas and villages which were earlier deprived of banking access. The penetration saw geographical expansion of many of the branches into the unbanked areas in the country and led to the financial accessibility to rural people.

Financial Awareness – Geographical expansion to rural areas meant wide spread awareness about savings, deposits, lending, borrowing among all sects of the country.

Improved regulation –Nationalization meant the government had control over whom to lend money and had kept the eyes on how it was being used by the borrowers. This led to lesser fraudulent behaviour.
The Indian banking sector went through another nationalization phase in the year 1980.
However, it had its fair share of demerits such as inefficiency due to lack of competition and less risk taking tendency, Poor infrastructure, Political interference before reformed once again in the famous 1991 economic reform phase to enter into a more stabilized era.

How did the nationalization of private banks help India in 1969? What were the motives behind this decision?


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