Answer to Question #193869 in Management for Peter Masih

Question

Indian Banking has witnessed major changes starting from nationalization in 1969 of 14 

private sector banks again to privatization of banks in 1990s. Year 2014 resulted in

setting of small Payment Banks in different nooks & corners of the country to a

diametrically opposite step of mergers and consolidation of many weak public sector banks with a few large banks in 2018/19. What has been the economic & financial 

compulsions/reasons for such changes in five decades?​

Answer 1

Nationalization of 14 major lenders accounted for 85 per cent of bank deposits in the country in 1960s. Six more banks were later nationalized in 1980. The core objective for nationalization was to energize priority sectors at a time when the large businesses dominated credit profiles. The government of the time believed that the banks failed to support its socioeconomic objectives and hence, it should increase its control over them.

In the 21st century, the major problems with the public sector banks (PSBs) are governance, political interference and to an extent expertise which may not have kept pace in the area of credit evaluation. Apart from political and economic factors, there were banking reasons as well. There was a long-standing criticism that Indian banks were not willing to provide credit to agriculture. Also, since the private banks were run by big industrialists, they gave loans to themselves. The directors of the top banks also held directorships in several other industries leading to conflict of interest.

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