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Bank Nationalisation Good or Bad !!!


Conclusions about what nationalisation has achieved must consider the counter-factual situation of
what could have been achieved had there been no nationalization. The benefits of nationalization can
only be estimated using this counterfactual. There have been some careful studies that have looked at
the impact of bank nationalization using this careful lens. The findings are mixed.
Burgess and Pande (2005) study the RBI’s 4:1 formula where a bank was required to open 4 rural
branches to obtain a license to open an urban branch between years 1977 and 1991. They find that the
policy led to significant reduction in poverty in financially less developed states. However, Kochar
(2005) argues that integrated rural development program (IRDP), the Government’s flagship poverty
alleviation program, was actively implemented during this period with greater intensity in financially
less developed states. Therefore, it is almost impossible to conclude that government bank branch
expansion caused reduction in poverty. Panagariya (2006) also rejects the findings in Burgess and
Pande (2005) by arguing that the branch expansion program of similar intensity existed even before
nationalization and hence the 1977-1991 period is not special in terms of branch expansion. In other words, differential impact on poverty seen during 1977-1991 cannot be attributed to nationalization.
Finally, Cole (2009) carefully examines the impact of the second wave of bank nationalization
undertaken in the year 1980. He exploits the fact that banks above certain threshold size were
nationalized and compares regions having higher proportion of banks that marginally crossed the
nationalization threshold and regions having higher proportion of banks that narrowly missed the
threshold. The study finds no significant benefit of nationalization on the real economy. In fact, he
shows that employment in trade and services declines and the quality of financial intermediation
deteriorated. There was increase only in the quantity of credit.
Over and above these studies, we also know that despite nationalization a significant portion of
the poor remained unbanked till 2014. Financial inclusion, in large part, happened in August 2014
through the Pradhan Mantri Jan Dhan Yojana (PMJDY), the first week of which saw more than 18
million bank accounts—a record in the Guinness Book of World Records.
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