Nationalisation over the last five decades has contributed immensely to banks’ outreach. It can be recalled that 20 banks were nationalised in two phases — 14 in the midnight of 19th July 1969 and six more in April, 1980, under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, thus bringing 91% of the banking system under government control. July 20th marked the bank nationalisation day.
Historically, private banks, more importantly during pre-independence period, had a tendency to lend only to large industries and business houses depriving credit to the people at the bottom of the pyramid. Banks were hardly present in the hinterlands. A strong and well-spread banking system with equitable credit flow to the hinterland was essential to rejuvenate the economy under the Five Year Plan. Hence, nationalisation was considered necessary to expand the banking network to accelerate socioeconomic transformation.
After the nationalisation of major banks, the shift of focus was evident from ‘class banking’ to ‘mass banking’. Thus, the journey of expansion of the banking system that began modestly picked up speed and efficiency penetrating banking in the hinterland. The massive branch expansion in rural areas could make the desired difference. The commitment to spread banking further accelerated with the introduction of the lead bank scheme (LBS) in 1969, State-Level Bankers Committee (SLBC), district credit plans, priority sector lending (PSL) norms in 1974, liberal branch expansion policy and formation of Regional Rural Banks (RRBs) in 1975. Nabard was formed in 1982 to accelerate rural development. The formation of such new institutions and expansionist banking policies speeded up the outreach of banks to pursue integrated rural development.
Going beyond providing banking services, PSU banks played a critical role in coordinating with State/district/tehsil/block level units of the government and district industries centres and facilitated in implementing welfare schemes. Thus, PSU banks served as a conduit to disburse subsidies, implemented government-sponsored schemes for integrated rural development, routed interest subventions, facilitated debt waiver schemes and fulfilled mandatory lending norms. The combined impact has improved the economic growth of the rural sector and created sensitivity towards micro-enterprises.
After working assiduously for over five decades, a compatible ecosystem could be established for wider access, usage and quality of banking services. Thus, it could come a long way in facilitating access to banking services to the last mile and in increasing the usage of financial products. Post the bank reforms, new generation private banks and differentiated banks have inundated the banking space and even non-banks, including aggressive fintechs, are joining the fray. A report of the working group of the RBI, recently proposed that non-banks with an asset size of over Rs 50,000 crore should be granted a bank licence, of course, subject to fulfilling certain criteria.
Changing Shape of Banking
Proliferation of technology-led delivery channels has helped banks reach the masses using a large network of low-cost means by putting up point of sale (PoS) terminals and business correspondents. Virtually, every mobile phone has come to be a mini-bank branch with digital lending and neo banks (virtual banks) vying to occupy the banking space, reaching out to larger geographies.
The ability of PSU banks to adopt state-of-the-art technology has led to massive improvement in deepening digital banking services. They could compete with their private peers. The Jan Dhan, Aadhaar and Mobile (JAM) ecosystem brought about a major shift in connecting masses with the formal banking system. The 30 years of post-reform banking system driven by technology and proliferation of private banks have challenged the relevance and utility of PSU banks.
With the broad evidence of successful private banking system gaining a steady market share at the cost of PSU banks and with the muscle of private banks stretching far and wide, the role of PSU banks started to look dim. Twenty-seven PSU banks with 91% of market share in the banking business are now down to 12 with a receding market share. Of the 12, two banks – Central Bank of India and Indian Overseas Banks — are on the ownership fence to be soon privatised.
More starkly, the market share of PSU banks declined to 59% in credit by December 2020 as against 65% in December 2017. In the same period market share of private banks increased to 36% from 30%. Deposit growth of private banks in March 2021 was 16.6% and PSU banks 10.4%. Credit growth was 9.1% and 3.6% respectively.
But when we look at the contribution of PSU banks to the grassroots level of the economy, it is astounding. To cite an example, of the 426.4 million bank accounts opened so far under the Pradhan Mantri Jan Dhan Yojana, private banks have opened only 12.6 million (3%) whereas PSU banks have opened 337.1 million (79%) and RRB 76.7 million (18%) accounts. It shows the deep connect that PSU banks have with the hinterland.
Even though PSU banks may be trailing behind their private peers in some parameters, the spirit with which they stay committed to socioeconomic transformation is unparalleled. With people in the hinterland largely dependent on micro-enterprises/small businesses looking for subsidies, low ticket size loans and routing of stimulus/concessions, the services of PSU banks continue to be relevant.
The government has to consider unwinding the policy of nationalisation slowly while still retaining considerable ownership with it in the larger interest of the livelihood of people at the grassroots level. Any haste in changing the ownership can negate the benefits that PSU banks have provided thus far.
(The author is former General Manager – Strategic Planning, Bank of Baroda, Hyderabad. Views are personal)
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