Answer to Question #200022 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

The reason for nationalising and transforming banks in India was to align the banking sector with the objectives of socialism which was adopted by the government after independence. This was based on the reccomendations of congress committee reports. Similarly, there were concerns about the banking system which offered credit based on class. Most of them were owned by industrialists and offered loans to fellow businessmen. Therefore, other sectors such as agriculture and small scale industries could not access credit. Finally,the changes were aimed at having social control over banks by minimizing conflict of interest arising from bank executives taking loans in the firms they manage.