Evil consequences of bank Nationalisation

Driven by populist politics rather than rational economics, the 1969 decision of then prime minister Indira Gandhi to nationalise the country’s 28 major private sector banks which were joint stock companies with substantial shareholding of the public, and managed by some of the most reputed business houses of the subcontinent, including Tata, Birla and Lalbhai, among others, was a good political but bad economic idea. It helped her to prevail over the Syndicate — the conservative wing of the Congress party — and triumph in the General Election of 1971. But economically, it was a disaster because the country’s major banks with wide public shareholding, in effect, became the private banks of the country’s amoral politicians, and the Congress party. 

Nemesis was not long in coming. Within two years, rampant loot of the banks by way of loan melas in which assets of the newly nationalised banks were looted and disbursed among Congress party officials and workers, prompted the country’s highly respected Gandhian leader Jaiprakash Narayan (JP) to come out of political hibernation and launch a nationwide anti-corruption campaign against Mrs. Gandhi and the Congress party. 
By then, the worst apprehensions of bank nationalisation critics had been realised. A mere phone call from the prime minister or cabinet minister’s office was enough for careerist bank managers to advance large and small loans to nominees. Consequently when OPEC (Organisation of Petroleum Exporting Countries) imposed an embargo on oil supply to the United States in 1973 and crude oil prices doubled overnight, the Indian economy was in no shape to confront it and inflation soared out of control, depleting public sector banks (PSBs) which had to be repeatedly recapitalised. 

With public agitation led by JP snowballing and an Allahabad high court judgement in an electoral malpractice case going against her, in 1975 Mrs. Gandhi declared India’s first — and as yet only — internal Emergency. JP and over 100 opposition leaders were arrested and jailed, and heavy censorship was imposed on the press. 
The subsequent history of post-Emergency India is well-known and does not bear repetition. However the moot point is that PSBs were untouched by the slew of reforms following the historic liberalisation and deregulation of industry and business in 1992. That’s because PSBs had become an invaluable resource for politicians of all parties who infiltrated cronies and kith and kin ready and willing to do their bidding, into top decision making positions. Therefore, the hundreds of banking scandals in which crony capitalists squandered unmerited loans disbursed by PSBs. 

The solution is self-evident. The country’s PSBs should be de-nationalised. The public interest will be far better served if PSB shares are held by thousands of shareholders rather than a single owner, i.e, the Union government.