Nationalization of Commercial Banks

Nationalization of commercial banks means the transfer of the ownership and control of privately owned banks to the government. In India this was done in two major steps — a first group of large commercial banks was taken over in 1969 and a second group in 1980 — so that the greater part of the banking system passed into public ownership. Before nationalization most large banks were privately owned and, critics argued, served mainly big industry and trade in the towns while neglecting agriculture, small industry and the rural poor.

Objectives (reasons) of nationalization. The government's stated aims were:

• To break the concentration of economic power — private banks were felt to favour a few large industrial houses, often those connected with the bank's own owners.
• To extend banking to rural and neglected areas — to open branches where none existed and bring banking to villages and small towns.
• To direct credit to priority sectors — agriculture, small-scale industry, small traders, artisans and weaker sections, which private banks had largely ignored.
• To mobilise savings on a larger scale and channel them into planned economic development.
• To promote a wider, more balanced regional development rather than concentration of banking in a few prosperous regions.
• To make banking an instrument of social and economic policy in line with the country's plans.

Effects of nationalization. In the years that followed:

• The number of bank branches expanded enormously, especially in rural and semi-urban areas, so that banking reached a far larger part of the population.
• Deposits rose sharply as savings were mobilised from areas previously outside the banking net.
• A growing share of credit was directed to priority sectors — agriculture, small industry and weaker sections.
• Public confidence in banks increased, because government ownership was seen as a guarantee of safety. …