Denationalise banks

Denationalise banks

Their state takeover has long outlived its use.

Fifty years ago, Prime Minister Indira Gandhi nationalised 14 large banks. It remains one of the most consequential decisions since Independence. Most economic policies have changed with time, adjusting to shifting contexts. Bank nationalisation, however, remains impervious to change. Tectonic shifts, be they political or economic, have bypassed it. There doesn’t seem to be another subject which evokes the same level of political consensus or reluctance to have a rational discussion as continued state control of banks. This won’t do.

Nationalisation of banks was driven mainly by political events. As early as 1948, it was discussed within the politically dominant Congress party but didn’t gain traction. In 1960s, in the backdrop of two wars, food shortages, economic hardship and a power struggle within Congress, nationalisation found political support. It aimed to push banking into all segments, particularly agriculture. Nationalisation did have benefits. Gross saving as a proportion of GDP increased from 12% in 1968-69 to 34.65% by 2011-12. This domestic saving financed most of the concurrent increase in investment. However, political interests influenced operations. Till 1990, intermediation by public sector banks (PSBs) was biased in favour of government and new private banks were not allowed to come in.

Early 1990s witnessed the entry of new private banks. But PSBs as a group still dominate. The bad loan crisis is largely that of PSBs. Political influence has undermined their soundness and extracted a cost in the form of repeated re-capitalisation, borne by taxpayers. Today, there’s no economic case for continued nationalisation. If anything, public resources locked up as bank capital are needed elsewhere. The only deterrent to denationalisation is politics. A beleaguered Indira nationalised banks. A dominant Prime Minister Narendra Modi should roll it back if he wants a $5 trillion economy by 2024.