Public sector banks played a key role in Narendra Modi’s return to power in 2019 Lok Sabha election.
Prime Minister Narendra Modi since coming to power in 2014 has laid great emphasis on providing banking access to maximum number of people through Jan Dhan account programme. He practically turned banks into conduits connecting the government with people (read voters) for direct transfer of subsidies (which were earlier given to companies), cash assistance under PM Kisan and loans under schemes for entrepreneurship, skill development, disability assistance and the like.
Modi could do so because the public sector banks enjoyed government protection for 45 years before he came to power. It was Indira Gandhi’s doing that the banks were given a public nature.
Indira Gandhi nationalised 14 major banks through an Ordinance on July 19, 1969. These banks held 70-85 per cent of total deposits in banks at the time. The decision to nationalise these banks drew sharp criticism from economists and more aggressively from politicians.
Why were banks nationalised?
Before Indira Gandhi nationalised banks, only State Bank of India was a public sector undertaking, having been nationalised in 1955. The SBI nationalisation had happened in the backdrop of private banks going bankrupt at an alarming rate.
More than 360 banks had failed between 1947 and 1955 — the rate of collapse was 40 banks a year. The trend continued through the 1950s and the first half of 1960s. This had forced Morarji Desai, the then finance minister, to launch a massive bank consolidation drive. It brought down the number of banks from 328 in 1960 to 68 in 1965.
Banks were failing largely due to speculative financial activities but when Indira Gandhi became the prime minister in 1967 and brought back Morarji Desai as her finance minister, she faced another problem that posed a political challenge to her. The banks were not giving credit to agriculture and not enough to industry. The banks were more interested in extending credit for trade.
The collapse of banks were causing distress among people, who were losing their hard-earned money in the absence of a strong government support and legislative protection to their money. Indira Gandhi saw a rare chance to become people’s hero at a time when she was being challenged within the Congress party.
Those were different times for the Congress. A group of leaders led by K Kamraj and Morarji Desai, known as the Syndicate, controlled the party and Indira Gandhi was being forced to toe their line. Her political authority was invariably questioned by those who were colleagues of her father, Jawaharlal Nehru. The death of President Zakir Hussain saw both sides taking off their gloves. The Syndicate put up Neelam Sanjeeva Reddy as its presidential candidate to challenge Indira Gandhi, who favoured VV Giri.
How did Indira do it?
On July 12, Indira Gandhi announced her intention at the Congress’s Bangalore session to nationalise private banks. This led to flutter among the Congress leaders and the RBI, which was not ready for the move.
Indira Gandhi needed to get bank nationalisation done in next seven days as stand-in President VV Giri was to step down on July 20, and Indira Gandhi was not sure if Giri would win the presidential election. The Syndicate candidate was not expected to approve of Indira Gandhi’s move.
A team comprising Indira Gandhi’s principal secretary PN Haskar, one of RBI deputy governors A Bakshi and DN Ghosh, a bureaucrat got to work almost secretly. Neither IG Patel, then economic affairs secretary, nor LK Jha, then RBI governor, knew of the plan.
A draft Ordinance was prepared on July 18 and the next day it was passed by the cabinet at 5 pm. President Giri promulgated it and Indira Gandhi addressed the nation at 8.30 pm. It had come as a shocker to the business community, as the RBI noted. But the people were happy and Indira Gandhi won the perception battle which helped her win 1971 Lok Sabha polls and also 1972 assembly polls in many states.
Incidentally, Narendra Modi’s demonetisation announcement — in an unscheduled televised national address — was made at 8.15 pm and came as a shocker to business community but hugely welcomed by the general public. The subsequent state polls in Uttar Pradesh and other states stood testimony to that.
How did Modi benefit from bank nationalisation?
In August 7, 1969 Indira Gandhi outlined the objectives of bank nationalisation in a radio address. These were, removing control of the few on banking system, providing adequate credit for agriculture, small industry and exports, giving a professional bent to bank management and encouraging a new class of entrepreneurs.
She said, “Nationalisation is necessary for the speedy achievement of these objectives.”
Now, consider how Modi reached out to people through banks. Assistance for constructing toilets under Swachh Bharat programme was given through banks. Crop insurance schemes were implemented through banks. Direct transfer benefit scheme, originally started by the Manmohan Singh government, but taken up in full vigour by the Modi government. This meant people got subsidy benefits directly in their bank accounts.
The Modi government claims to have given Mudra loans to about 20 crore individuals. The collateral-free loan for entrepreneurship is provided through public sector banks. It is another matter if the same banks are now facing a problem of over Rs 17,000 crore of NPAs against Mudra loans.