It has been good economics too

S.Narendra

Announcing the nationalisation of banks.
(Photo Courtesy: surajyadavopinion.blogspot.in/The Times of India)

Wh e n internationally well known bank brands were coming crashing down under the weight of their own greed ten years back, (2007-2008), and in turn seeking bail-outs from their governments, Indian and foreign commentators had noted that Indian banks did not catch the global infection because of their government ownership. In fact, India should have thanked the much vilified Mrs Indira Gandhi for nationalizing private banks that prevented Indian financial system from going bust along with the global melt down. This July (2019) marks the 50 anniversary of bank nationalization.

The nationalisation of commercial Bank’s fifty years back came as a popular political drama serving good economics as well.

On the day man first landed on the moon, the Indian government walked the first step on its road to climbing the ‘commanding heights of the economy’ with bank nationalization. This distant July month was packed with intrigue and struggle for power within the Congress party and economics became the hand maiden of power and influence.

Very swift political currents began to reshape Indian polity after prime minister Lal Bahadur Shastri’s death in early 1966.Power brokers in the party installed Mrs Indira Gandhi as his successor by defeating Morarji Desai in the prime ministerial poll. In the first general elections held in post- Nehru era in 1967, the Congess party had lost power in many states and the opposition ranks in parliament had swelled, especially that of Swatantra party representing ex-royalty, and business, and Jan Sangh.The Congress was seemingly losing its traditional social and regional base and also the support of business and industry. In the new Congress government, Morarji Desai was made the deputy prime minister as well as the finance minister. While Mrs Gandhi opposed his proposal to bring farm incomes under income tax, Desai stalled her suggestion for bank nationalization, with his ‘social control’-- a system of token oversight over banks.

S. Nijalingappa The Bangalore All India Congress Committee (AICC) session in the summer of 1969 at the glass-house in Lalbag, became a watershed. The party president Nijalingappa, associated with party old guard, in his opening address to the session had given a call for probusiness policies.Mrs Gandhi countered with her ‘stray thoughts’, outlining a more pro-people line hinting at greater government control over the economy. When the post of president of India fell vacant in May, after the death Dr.Zakir Husain, the rift within the party became an unbridgeable divide. Mrs Gandhi and her supporters decided to oppose the nominee of party old guard (dubbed as ‘syndicate’) for Rastrapati.

Morarji Desai On July 14th, the prime minister’s office notified the news agencies that Morarji Desai had been stripped of his finance portfolio.I was then his Information officer, and went into his office. On being shown this news flash in his office, Desai sent in his resignation letter, asked for his personal car and left for his residence. From that moment up to 19 th July , I was at his residence from morning till late into the night.On July 19th, in the afternoon,the prime minster accepted Desai’s resignation from the cabinet.
Around six 0’clock, Economic Affairs Secretary Dr.I.G.Patel gave me a copy of the ordinance nationalising 14 private banks, but forbid me from leaving the finance ministry until 8.45 pm when Mrs Gandhi was expected to announce the bank nationalisation over AIR.

It was her master stroke to go to the people for support over the heads of party power brokers who wanted her to be their “gungi gudiya’ or dumb puppet.

Until this nationalization, a few business houses in order to maintain their dominant position managed a cosy arrangement with commercial banks and general insurance, since they were also their owners. A RBI report on rural credit had bared the stark reality of rural poverty and the total neglect of agriculture and rural sector by private banks.Desai’s ‘social control’ seems to have not done anything to correct this situation. Successive future governments that claim to have enhanced the flow of credit to farmers rarely thank Mrs Gandhi for giving them this powerful political tool.

Banking in unbanked areas as well as the opening of crores of zero balance accounts have become possible because of this single move. Bank depositors in India have overwhelmingly voted for the safety offered by public sector banks, even while foregoing some of the blandishments offered by their private competitors.

Interestingly, the officials chosen to work on nationalization could not even lay their hands on any reliable official records for determining the size of banks to be nationalized. They reportedly took the cue from a newspaper (Economic Times), research article that divided banks with Rs 50 crore deposits and below.

Some top officials in the finance ministry changed and a new banking department was added to it for exercising broad policy oversight over banks. The finance and other economic ministries under strict prime ministerial supervision came with a series of policies whose traces are present in most sectors of Indian economy even today.

Many of such policies for the broadening of industrial base, entrepreneurship, advances in agriculture and allied occupations, and measures to change the face of rural India, perhaps, would not have been possible without this single act 50 years back.

Whenever the subject of expansion of access to banking, particularly in favour of under served areas crops up, arguments are advanced for opening up of the sector to private and international banks. It is rarely noticed that even the nationalized banks needed to be cajoled and incentivsed to move into difficult geographies and sectors.

The banks had to be driven to unfamiliar rural and other sectors with a definite policy of priority lending. For the first time the banks were asked to lead economic development with the district as the focus. Each bank adopted a district and prepared detailed surveys of their economic potentials and steps needed to tap it.

While there is wealth of research damning the effects of bank nationalization, partly motivated, undertaken when rainbow economic conditions prevailed, contrary non-partisan research is sparse. The all pervading economic gloom of the present, perhaps, is an opportunity for a proper appraisal of the politics of the ideological debate over bank nationalization and the road ahead.

It is not ownership that matters for the growth and development of healthy financial institutions, of which banks are a vital part. What is required is an independent, specialised and prudent regulatory vigilance of the financial system that is not influenced by political exigencies.

This needs to be separated from the other debate over the merits or otherwise of the government dominating the ‘commanding heights of the economy’. Or for that matter, on the issues moral hazard of loan waivers, mounting bank NPAs and their write downs,crony capitalism assisted by pliable government banks. The present government is implementing the UPA governments idea of merging banks to create viable big Indian banks in order to make them globally competitive.

There is a section of opinion that has been attacking the government ownership of banks on the ground that bank’s lend under political pressure and acquire toxic debts. Such critics should remember that in the western countries, including the USA, privately owned banks brought down the global financial system itself by their unregulated greed and mismanagement.

Sadly, even when high level probes named individuals for wrong doing, the relevant government departments did not pursue prosecution of such individuals.While billions of dollars of public money was lost due to misconduct on the part of bank management, they were let off with fines of a few million dollars.

In the normal course the golden anniversary of bank rationalisation, that is just a few weeks away, should have been a fitting occasion for recording their saga- their immense contribution to the building of modern India during the past five decades. This would be a very interesting economic history. Unfortunately, their NPA story authored by Indian politics is eclipsing their positive legacy.

The author has been
Distinguished Civil Servant
and thinker of India.



		EDITOR'S MAIL EDITOR'S COMMENT WATER CRISIS FRANKLY SPEAKING GRASSROOTS SUPPORT INDIA & NEIGHBOURS BANK NATIONALIZATION-50 YEARS REALPOLITIK KASHMIR WATCH ANDHRA POLITICS A PERSON OF SUBSTANCE KERALA LEFT MP POLITICS GREAT PLAYWRIGHT & THINKER CHANDIGARH DIARY HITS & MISSES PITIABLE CONDITIONS NOTEBOOK DEATH OF A PRESIDENT AMERICAN WATCH BOOK BAZAAR SIGNS OF THE TIMES A PAGE FROM ANCIENT INDIA REMEMBERING THE HISTORIC DAY ART OF LIVING Issue:June' 2019 Subscribe Now	BANK NATIONALIZATION-50 YEARS It has been good economics too S.Narendra Announcing the nationalisation of banks. (Photo Courtesy: surajyadavopinion.blogspot.in/The Times of India) Wh e n internationally well known bank brands were coming crashing down under the weight of their own greed ten years back, (2007-2008), and in turn seeking bail-outs from their governments, Indian and foreign commentators had noted that Indian banks did not catch the global infection because of their government ownership. In fact, India should have thanked the much vilified Mrs Indira Gandhi for nationalizing private banks that prevented Indian financial system from going bust along with the global melt down. This July (2019) marks the 50 anniversary of bank nationalization. The nationalisation of commercial Bank’s fifty years back came as a popular political drama serving good economics as well. On the day man first landed on the moon, the Indian government walked the first step on its road to climbing the ‘commanding heights of the economy’ with bank nationalization. This distant July month was packed with intrigue and struggle for power within the Congress party and economics became the hand maiden of power and influence. Very swift political currents began to reshape Indian polity after prime minister Lal Bahadur Shastri’s death in early 1966.Power brokers in the party installed Mrs Indira Gandhi as his successor by defeating Morarji Desai in the prime ministerial poll. In the first general elections held in post- Nehru era in 1967, the Congess party had lost power in many states and the opposition ranks in parliament had swelled, especially that of Swatantra party representing ex-royalty, and business, and Jan Sangh.The Congress was seemingly losing its traditional social and regional base and also the support of business and industry. In the new Congress government, Morarji Desai was made the deputy prime minister as well as the finance minister. While Mrs Gandhi opposed his proposal to bring farm incomes under income tax, Desai stalled her suggestion for bank nationalization, with his ‘social control’-- a system of token oversight over banks. S. Nijalingappa The Bangalore All India Congress Committee (AICC) session in the summer of 1969 at the glass-house in Lalbag, became a watershed. The party president Nijalingappa, associated with party old guard, in his opening address to the session had given a call for probusiness policies.Mrs Gandhi countered with her ‘stray thoughts’, outlining a more pro-people line hinting at greater government control over the economy. When the post of president of India fell vacant in May, after the death Dr.Zakir Husain, the rift within the party became an unbridgeable divide. Mrs Gandhi and her supporters decided to oppose the nominee of party old guard (dubbed as ‘syndicate’) for Rastrapati. Morarji Desai On July 14th, the prime minister’s office notified the news agencies that Morarji Desai had been stripped of his finance portfolio.I was then his Information officer, and went into his office. On being shown this news flash in his office, Desai sent in his resignation letter, asked for his personal car and left for his residence. From that moment up to 19 th July , I was at his residence from morning till late into the night.On July 19th, in the afternoon,the prime minster accepted Desai’s resignation from the cabinet. Around six 0’clock, Economic Affairs Secretary Dr.I.G.Patel gave me a copy of the ordinance nationalising 14 private banks, but forbid me from leaving the finance ministry until 8.45 pm when Mrs Gandhi was expected to announce the bank nationalisation over AIR. It was her master stroke to go to the people for support over the heads of party power brokers who wanted her to be their “gungi gudiya’ or dumb puppet. Until this nationalization, a few business houses in order to maintain their dominant position managed a cosy arrangement with commercial banks and general insurance, since they were also their owners. A RBI report on rural credit had bared the stark reality of rural poverty and the total neglect of agriculture and rural sector by private banks.Desai’s ‘social control’ seems to have not done anything to correct this situation. Successive future governments that claim to have enhanced the flow of credit to farmers rarely thank Mrs Gandhi for giving them this powerful political tool. Banking in unbanked areas as well as the opening of crores of zero balance accounts have become possible because of this single move. Bank depositors in India have overwhelmingly voted for the safety offered by public sector banks, even while foregoing some of the blandishments offered by their private competitors. Interestingly, the officials chosen to work on nationalization could not even lay their hands on any reliable official records for determining the size of banks to be nationalized. They reportedly took the cue from a newspaper (Economic Times), research article that divided banks with Rs 50 crore deposits and below. Some top officials in the finance ministry changed and a new banking department was added to it for exercising broad policy oversight over banks. The finance and other economic ministries under strict prime ministerial supervision came with a series of policies whose traces are present in most sectors of Indian economy even today. Many of such policies for the broadening of industrial base, entrepreneurship, advances in agriculture and allied occupations, and measures to change the face of rural India, perhaps, would not have been possible without this single act 50 years back. Banking in unbanked areas as well as the opening of crores of zero balance accounts have become possible because of this single move. Bank depositors in India have overwhelmingly voted for the safety offered by public sector banks, even while foregoing some of the blandishments offered by their private competitors. Whenever the subject of expansion of access to banking, particularly in favour of under served areas crops up, arguments are advanced for opening up of the sector to private and international banks. It is rarely noticed that even the nationalized banks needed to be cajoled and incentivsed to move into difficult geographies and sectors. The banks had to be driven to unfamiliar rural and other sectors with a definite policy of priority lending. For the first time the banks were asked to lead economic development with the district as the focus. Each bank adopted a district and prepared detailed surveys of their economic potentials and steps needed to tap it. While there is wealth of research damning the effects of bank nationalization, partly motivated, undertaken when rainbow economic conditions prevailed, contrary non-partisan research is sparse. The all pervading economic gloom of the present, perhaps, is an opportunity for a proper appraisal of the politics of the ideological debate over bank nationalization and the road ahead. It is not ownership that matters for the growth and development of healthy financial institutions, of which banks are a vital part. What is required is an independent, specialised and prudent regulatory vigilance of the financial system that is not influenced by political exigencies. This needs to be separated from the other debate over the merits or otherwise of the government dominating the ‘commanding heights of the economy’. Or for that matter, on the issues moral hazard of loan waivers, mounting bank NPAs and their write downs,crony capitalism assisted by pliable government banks. The present government is implementing the UPA governments idea of merging banks to create viable big Indian banks in order to make them globally competitive. There is a section of opinion that has been attacking the government ownership of banks on the ground that bank’s lend under political pressure and acquire toxic debts. Such critics should remember that in the western countries, including the USA, privately owned banks brought down the global financial system itself by their unregulated greed and mismanagement. Sadly, even when high level probes named individuals for wrong doing, the relevant government departments did not pursue prosecution of such individuals.While billions of dollars of public money was lost due to misconduct on the part of bank management, they were let off with fines of a few million dollars. It is not ownership that matters for the growth and development of healthy financial institutions, of which banks are a vital part. What is required is an independent, specialised and prudent regulatory vigilance of the financial system that is not influenced by political exigencies. In the normal course the golden anniversary of bank rationalisation, that is just a few weeks away, should have been a fitting occasion for recording their saga- their immense contribution to the building of modern India during the past five decades. This would be a very interesting economic history. Unfortunately, their NPA story authored by Indian politics is eclipsing their positive legacy. The author has been Distinguished Civil Servant and thinker of India.