Introduction

India's financial sector has undergone significant changes since its independence, with nationalization and subsequent privatization efforts being pivotal. One often overlooked question is why former Prime Minister Indira Gandhi did not merge banks during the nationalization process, and why subsequent leaders have not followed a similar approach. This article explores the reasons behind these decisions and the current policies of Prime Minister Modi, which seek to consolidate banks.

Background and Nationalization of Banks

During Indira Gandhi's tenure, the Indian government nationalized 14 banks in 1969. This move was driven by the need to increase financial inclusivity and reduce reliance on informal lending. The underlying assumption was that nationalized banks would operate under government oversight, fostering trust among the populace and providing access to banking services in rural and unprofitable areas.

Reasons for Not Merging Banks During Nationalization

The reasons for not merging banks during nationalization are multifaceted and rooted in the socio-economic conditions of the time. Several key factors contribute to this decision:

Lack of Formal Banking: During the early 1960s, formal banking networks were underdeveloped. Rural areas heavily relied on informal money lenders, making it challenging to establish a cohesive banking system through mergers. Localized Banking: Banks were predominantly localized, focusing on their immediate regions. The technological advancements required to link all branches were not yet available, making mergers impractical. Trust in Financial Institutions: Trust in financial institutions was still recovering from the wounds of colonialism. The populace was wary of private banks and more inclined to trust state-run entities. Core Banking Function: Banks act as intermediaries between savings and investments. Ensuring the safety of people's money was paramount, and nationalization helped build this trust.

Modi's Policy of Merging Banks

Prime Minister Narendra Modi's vision for India includes a consolidated banking system, with the objective of showcasing his leadership through a single, large bank. However, this approach faces significant challenges and criticisms:

Modi's plan to merge all banks into one giant institution is ambitious but fraught with challenges. Here are some reasons why this strategy is flawed:

High Bad Debt/NPA: The current bad debt or NPAs in the banking sector stand at approximately 8 lakh crores (800 billion dollars). The government has not been able to recover even 1 crore (10 million dollars) from defaulters. This is unsurprising given the scale of the problem and the lack of enforcement mechanisms. Personal Loans and Political Connections: Modi’s own friends and colleagues have availed of substantial loans. It is not easy for him to ask for repayment, especially in the context of political and social dynamics. Losses in PSUs: Many public sector undertakings (PSUs), including banks, are incurring significant losses. Railway operations, telecoms like BSNL and MTNL, and state-owned airlines like Air India, among others, are experiencing financial downturns. Merging these into a single large entity would not address underlying issues but would further strain resources. Negative Impact of Modi’s Policies: Numerous initiatives, such as the surgical strike, demonetization, digital India, and Swachh Bharat Abhiyan, have been criticized for failing to achieve their stated goals. Even the ambitious bullet train project has run into delays and financial trouble.

Conclusion

The strategy of merging banks proposed by Modi is not without its merits, but it faces substantial challenges. The historical and socio-economic context of India's banking sector necessitated a different approach in the 1960s, which is reflected in Indira Gandhi's decision to nationalize banks rather than merge them. The current situation, with high NPAs and unprofitable PSUs, underscores the need for a more nuanced and realistic approach to banking reform.