Reasons for nationalization:

 To energise priority sectors at a time when the large businesses dominated

credit profiles.

 There were 361 private banks which failed across the country in the period from

1947 to 1955, translating to an average of over 40 banks per year.

 This has resulted in depositors losing all their money as they were not offered any

guarantee by their respective banks.

 Ignoring agricultural sector: Commercial banks were seen as catering to the

large industries and businesses, ignoring the agricultural sector.

 In 1950, only 2.3% of the bank loans were channelled to farmers, with the figure

declining to 2.2% by 1967.

 Opening new branches: The focus was also on opening up of bank branches in

the rural and backward areas.

 Mobilization of savings: Nationalisation aimed at mobilizing the savings of the

people to the largest possible extent and to utilize them for productive purposes.

 Economic and Political reasons: Bank nationalization was one of her responses

to the economic and political challenges of the time.For example, there were two

wars—with China in 1962 and Pakistan in 1965—that put immense pressure on

public finances . Two successive years of drought had not only led to food

shortages, but also compromised national security.

  Before the nationalisation of banks in 1969, the government had tried to
address the economic problems through “social control”.
 This was to ensure a wider spread of credit and an increase in the credit
flow to emerging priority sectors.
 However, despite these measures, the banks were failing mainly due to
speculative financial activities.
 Post-1967, during Mrs. Indira Gandhi’s tenure, the banks were not giving
credit to agriculture and not enough credit to the industries.
 Due to this, agriculture and industries were facing a crisis during this
time.
 They were more focused on extending credit for trade.
 The crisis in the banking sector had resulted in wide-ranging
consequences leading to distress among the people.
 This resulted in the nationalisation of banks.
 The main objectives of nationalisation of banks are as follows:
1. Address the rising economic crisis that occurred in the 1960s.
2. Remove the dominance of the few in the banking sector.
3. Providing sufficient credit for agriculture, small industries, and exports.
4. Making the management of the banking sector more professional.
5. Encouraging new entrepreneurs.
6. Develop the backward areas within India

Positive impact:

 Increase in Savings: Financial savings rose as lenders opened new branches in

areas that were unbanked.

 Gross domestic savings almost doubled as a percentage of national income in the

1970s.
 Improve in bank efficiency: Due to the nationalization of banks, the efficiency of

the banking system in India improved. This also boosted the confidence of the

public in banks.

 Small scale industries boost: The sectors that were lagging behind like small-

scale industries and agriculture got a boost. This led to an increase in funds and

thus increases in the economic growth of India

 Penetration of banks: The nationalization of banks also increased the

penetration of banks. This was mainly seen in the rural areas of India.

 Financial inclusion: It was witnessed to some degree because:

 India’s nationalisation led to an impressive growth of financial intermediation.

 The share of bank deposits to GDP rose from 13% in 1969 to 38% in 1991.

 The gross savings rate rose from 12.8% in 1969 to 21.7% in 1990.

 The share of advances to GDP rose from 10% in 1969 to 25% in 1991.

 The gross investment rate rose from 13.9% in 1969 to 24.1% in 1990.

 Nationalisation also demonstrated the utility of monetary policy in furthering

redistributionist goals.

 Outreach increased: Banks were no longer confined to only metropolitan or

cosmopolitan in India. In fact, the Indian banking system has reached even to

the remote corners of the country.

  Increase in Public deposits: Purpose of nationalization is to promote rapid

growth in agriculture, small industries and export, to encourage new

entrepreneurs and to develop all backward areas.

 Reorientation of Bank Lending- Accelerated process of development especially

for priority sectors.

Negative impact:

 Socio-economic objectives : Failed to eradicate poverty and in scaling down

inequalities of income, wealth and entitlements, especially in rural India.

 Never suppressed private banks: The performance of nationalised banks, on the

parameters of branch expansion as well as increasing the number of deposits,

never surpassed that of private banks.

 Not able to achieve financial inclusion: Though bank nationalisation was made

for the purpose of extending bank facilities to rural areas, financial inclusion was

limited.

 Lower Efficiency and Profits