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50 Years Of Bank Nationalisation: The Banks That Were

The story of how ownership of India’s banks was transferred to the government 50 years ago. By banking historian Amol Agrawal.

Morarji Desai, who quit as Finance Minister due to imminent bank nationalisation in 1967, is seen here meeting bankers in New Delhi. (Photograph RBI History)
Morarji Desai, who quit as Finance Minister due to imminent bank nationalisation in 1967, is seen here meeting bankers in New Delhi. (Photograph RBI History)

When Indira Gandhi decided to proceed with nationalisation of banks in July 1969, the next question to ask was which banks and how.

Foreign banks were excluded for fear of a negative response and fourteen banks were identified. Who were these banks and what was the manner in which the ownership was transferred? That, in itself, makes for an interesting tale.

50 Years Of Bank Nationalisation: The Banks That Were

The 14 banks were spread across the country fairly evenly.

Of them, four had origins in Bombay, three in Calcutta, two in Madras, two in South Canara, and one each in Pune, Baroda, and Delhi. Other than South Canara, most of the other regions were political or commercial hubs, where it was natural for large banks to emerge and grow.

The Mangalore-Udupi region was neither, yet it had two of the largest banks in India. South Canara added two more banks to the public sector list in 1980, when six more banks were nationalised in the second round. This took the tally of large banks from the region to four, the same as Bombay.

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The largest bank to be nationalised was Central Bank of India, with deposits worth Rs 482.76 crore which, at the time, accounted for 10 percent of aggregate deposits of the banking system. As an aside, it is worth mentioning that there was a time when Central Bank of India was competing with State Bank of India and even had higher deposits.

Bank of Maharashtra was the smallest with 1.78 percent of aggregate deposits.

In terms of absolute profits, once again Central Bank of India was the most profitable bank to be nationalised and the least profitable was Indian Bank.

On the metric of the number of branches, Central Bank of India topped the list again, with 673 branches. Punjab National Bank ranked second in the number of branches with 619 branches.

How spread out was the reach of these banks?

UCO Bank had a presence in 22 states which was the highest among the 14 banks. UCO Bank also had the least number of branches in its home state of West Bengal. Bank of Maharashtra had a presence in just seven states, which was the lowest. It had the highest percentage of its branches in the home state of Maharashtra.

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How The Transfer Took Place

Once the banks had been identified, there was the question of how the transfer of ownership would take place and how existing shareholders would be compensated.

In order to nationalise these banks. fourteen new banks were created, and assets were transferred to the new entities.

There were three compensation options: cash; ten-year central government securities at par carrying 4.5 percent interest per annum; and thirty-year central government securities at par carrying interest at 5.5 percent per annum.

RBI’s history shows that the owners of Allahabad Bank and Indian Bank opted for all-cash compensation, while those of 10 banks chose all-securities. Owners of two banks opted for a mixture of the two.

The compensation offered to the owners of these banks on nationalisation was in line with their size, with Central Bank of India’s the highest, at Rs 1,750 crore.

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The Reactions

Given the scale of the decision, the reactions were mixed. RBI history notes that the business community was unhappy but factions of the Congress party and the Left welcomed the move.

  • Jyoti Basu, the Chief Minister of West Bengal, apparently said Morarji Desai’s resignation was good news and nationalisation was even better news!
  • Swatantra Party leader C Rajagopalachari wondered whether nationalisation was possible under the Constitution.
  • Former RBI Governors CD Deshmukh and HVR Iyengar expressed reservations against the decision.
  • FICCI President Ramnath Poddar called the decision “hasty” and thought social control was enough.
  • Atal Bihari Vajpayee questioned the need for ordinance when Parliament was to meet within two days.

To Vajpayee, Indira Gandhi replied, “it was essential to make a swift and sudden move” else the decision would have been open to manipulations. There was a feeling that RBI’s top management was unhappy with the decision and resignations were to follow, but nothing really happened.

In her budget speech for 1970-71, she said:

50 Years Of Bank Nationalisation: The Banks That Were

Former RBI Governor IG Patel summed up the reactions in his memoir:

50 Years Of Bank Nationalisation: The Banks That Were

Amol Agrawal is a faculty member at Ahmedabad University. He has a PhD in Indian Banking History and writes the Mostly Economics blog.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.