The precipitous outcome of the nationalization policy may nullify the benefits that the PSU banks have provided
Nationalization over the past five decades has contributed enormously to the influence of banks. It may be recalled that 20 banks were nationalized in two phases – 14 on July 19, 1969 at midnight and six others in April 1980, under the law on banking companies (acquisition and transfer of enterprises), 1970/1980, relating to thus 91% of the banking system under government control. July 20 marked the day of the nationalization of banks.
Historically, private banks, especially during the pre-independence period, tended to lend only to large industries and trading houses, depriving people at the bottom of the pyramid of credit. Banks were not very present in the hinterland. A strong and well-distributed banking system with fair credit flows to the hinterland was essential to rejuvenate the economy under the five-year plan. Therefore, nationalization was deemed necessary to expand the banking network to accelerate socio-economic transformation.
After the nationalization of the big banks, the change of direction was evident, from “class banking” to “mass banking”. Thus, the banking system expansion journey that started small gained speed and efficiency as it entered the hinterland of banking. Massive branch expansion in rural areas could make the desired difference. The commitment to expand the banking system was further accelerated with the introduction of the Main Banking System (LBS) in 1969, the State Bankers Committee (SLBC), district credit plans, Priority Sector Lending (PSL) standards in 1974, the expansion policy and the formation of liberal branches of Regional Rural Banks (RRB) in 1975. Nabard was created in 1982 to accelerate rural development. The formation of these new institutions and expansionary banking policies accelerated the scope of banks to pursue integrated rural development.
Beyond the provision of banking services, PSU banks played a critical role in coordinating with state / district / tehsil / bloc level units of government and district industrial centers and facilitated program implementation. social protection. Thus, PSU banks have served as a channel for disbursing grants, implementing government-sponsored programs for integrated rural development, channeling interest grants, facilitating debt cancellation programs, and meeting debt standards. compulsory loan. The combined impact improved the economic growth of the rural sector and created sensitivity towards microenterprises.
After working diligently for more than five decades, a compatible ecosystem could be established for wider access, use and quality of banking services. Thus, it could do a lot to facilitate access to banking services until the last mile and increase the use of financial products. After banking reforms, next-generation private banks and differentiated banks have flooded the banking space and even non-banks, including aggressive fintechs, are joining the fray. An RBI task force report recently proposed that non-banks with an asset size of over Rs 50,000 crore should obtain a banking license, of course, subject to meeting certain criteria.
Changing the shape of the bank
The proliferation of technology-based distribution channels has helped banks reach the masses using a vast network of low cost means by setting up point of sale (PoS) terminals and trade correspondents. Virtually every mobile phone has become a mini-bank branch with digital loans and neo-banks (virtual banks) competing to occupy the banking space, extending to larger geographic areas.
The ability of PSU banks to adopt cutting edge technology has led to a massive improvement in the deepening of digital banking. They could compete with their private peers. The Jan Dhan, Aadhaar and Mobile (JAM) ecosystem has brought about a major shift in the connection of the masses with the formal banking system. The 30 years of technology-driven post-reform banking system and the proliferation of private banks have called into question the relevance and usefulness of PSU banks.
With the abundant evidence of the success of the private banking system gaining a stable market share at the expense of PSU banks and with the muscle of private banks extending far and wide, the role of PSU banks began to appear weak. Twenty-seven PSU banks with 91% market share in the banking sector are now reduced to 12 with declining market share. Of the 12, two banks – the Central Bank of India and Indian Overseas Banks – are set to be privatized soon.
More clearly, the market share of PSU banks fell to 59% in credit in December 2020 against 65% in December 2017. During the same period, the market share of private banks increased from 30% to 36% . The growth of deposits of private banks in March 2021 was 16.6% and that of PSU banks was 10.4%. Credit growth was 9.1% and 3.6% respectively.
Accumulation of benefits
But when you look at the contribution of PSU banks to the local level of the economy, it’s staggering. To cite an example, of the 426.4 million bank accounts opened so far under Pradhan Mantri Jan Dhan Yojana, private banks have only opened 12.6 million (3%) while PSU banks have opened. 337.1 million (79%) and RRB 76.7 million (18%) accounts. This shows the deep connection that PSU banks have with the hinterland.
While PSU banks may lag behind their private counterparts in certain parameters, the spirit with which they remain engaged in socio-economic transformation is unprecedented. As the hinterland dwellers are heavily dependent on micro / small enterprises seeking grants, small loans and channeling incentives / concessions, the services of PSU banks remain relevant.
The government should consider slowly unwinding the nationalization policy while retaining considerable ownership of it in the broader interest of grassroots livelihoods. Any rush to change ownership can negate the benefits that PSU banks have provided so far.
(The author is the former Managing Director – Strategic Planning, Bank of Baroda, Hyderabad. Opinions are personal)
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