This week marks 50 years of one of the most important economic decisions taken by a government in independent India. Like the other relatively recent move on November 2016 to withdraw high value notes of Rs 500 and Rs 1,000, the decision to nationalise 14 banks by the Congress government led by Indira Gandhi on July 19, 1969 did not quite rest on economic logic but was politically propelled. The objective, then, was to force banks, many of which were controlled by business groups, to lend to the farm and other sectors, to small firms, offer services in the hinterland and expand credit, especially in rural areas. The decades since then have seen a structural transformation — evident in the countrywide footprint of banks, channelising of savings by them to productive investment, support for industry and to the government to finance its plan investments, deliver on its social banking mandate, generate jobs in the services sector, help reduce regional disparities and broadly enhance growth. That was the start of financial inclusion.
Many metrics capture that phase of the Indian banking industry’s growth. But the loan melas of the 1980s, soon after the second round of bank nationalisation marked by coercive lending to support government programmes, dealt the first deep blow from which it took the country’s state-owned banks years to recover. Later, what hurt PSU banks severely was the foray into infrastructure financing — an area where they had little expertise, the risk of an asset liability mismatch and imprudent lending during the heady growth years between 2005-2009. The Indian taxpayers have so far picked up the tab for repairing bank balance sheets with lakhs being pumped to recapitalise banks and bolster lending over the last few decades without generating enough returns. In its first term, the Narendra Modi government missed an opportunity for governance reforms in the banks it owns. A government with a strong political mandate like NDA 2 should be better equipped to let go of many of its banks after 50 years — with a possible backstop of a 26 per cent or 33 per cent holding to be progressively divested to assuage concerns.
More political molycoddling on separation of ownership from the management of banks will impose huge fiscal costs which will have to be borne again by taxpayers. Importantly, it will also drain resources which should ideally be for delivery of public goods.