Commercial Banks in India after Nationalisation

Summary

Delivered on 30th March 1971 as the second A. D. Shroff Memorial Lecture, B. N. Adarkar — a former Governor of the Reserve Bank of India and at the time Custodian of Central Bank of India Ltd. — uses the occasion to take stock of India’s commercial banking system roughly eighteen months after the July 1969 nationalisation of fourteen major banks. Adarkar begins by paying homage to Shroff as a ‘crusader for free enterprise’ whose convictions in the potentialities of a free market economy he respected even where he did not share them, and then sets out his own brief: review the available data on the working of the nationalised banks and evaluate them against ‘some general principles’ of sound banking, while disclaiming that his views represent the Government, the RBI or Central Bank of India.

The lecture’s central proposition is that nationalisation has structurally strengthened the banking system — bringing the major nationalised banks into closer harmony with the State Bank group, raising the security of deposits, and creating a better environment for monetary and banking policy — but that the success of the experiment depends on preserving certain disciplines that pre‑date public ownership. Adarkar argues that banks ‘do not cease to be commercial concerns even after nationalisation’; they remain trustees for community savings, and the return on the community’s investment in their compensation bonds (carrying 5½ per cent interest) sets a minimum benchmark profitability cannot fall short of without becoming ‘a drain on the Exchequer’. He pushes hard on the need to segregate genuinely social‑objective lending (rural branches, small loans, public‑policy directed credit) from a bank’s normal operations so that managerial inefficiency cannot hide behind the language of social purpose.

The second half of the rendered pages turns from financial discipline to monetary discipline. Adarkar warns that credit‑hungry economies suffering from chronic inflation must build credit planning into any scheme of credit restraint, since blanket restriction hurts genuine production as well as speculation. He defends RBI refinance as a legitimate bridge but criticises arrangements that let banks become indefinitely dependent on ‘created money’ from the Reserve Bank — particularly for food procurement and buffer‑stock financing — and endorses the penal‑rate mechanism for restraining excess borrowing. He closes the rendered portion by celebrating the achievements of branch expansion (6,633 offices at nationalisation rising to 8,598 by September 1970, of which 1,651 new offices opened in rural and semi‑urban areas) while noting that India still has only one bank office per 52,000 people versus 14,500 in Japan, 6,000 in the U.S. and 4,000 in the U.K., and warning that further branch expansion must be matched by stronger internal organisation, training, and Head Office control over branch managers.

Key points

• Frames the lecture as a tribute to A. D. Shroff and an evaluation of fourteen-bank nationalisation (July 1969) against general principles of sound banking, using data available roughly 18 months on.

• Argues that nationalisation has strengthened the banking system structurally — closer co‑ordination with the State Bank group, better protected deposits, and a better environment for monetary policy.

• Insists nationalised banks remain commercial concerns and trustees for community savings; the 5½ per cent interest on compensation bonds sets a minimum return on community capital that profits must, over a period of years, exceed.

• Calls for management and accounting systems that segregate uneconomic, public‑policy‑driven operations (e.g. rural branches in undeveloped areas) from normal banking operations, so social objectives cannot be used to mask managerial inefficiency.

• Distinguishes financial discipline from monetary discipline and argues that any credit‑restraint regime in a credit‑hungry, inflation‑prone economy must be paired with deposit mobilisation and rational credit planning across sectors.

• Defends RBI refinance as legitimate bridge finance but warns against banks becoming indefinitely dependent on ‘created money’ — particularly for food procurement and buffer‑stock financing — and endorses the penal rate as a check on excessive borrowing.

• Reports the rapid post‑nationalisation branch expansion (6,633 → 8,598 offices, with 1,651 new rural/semi‑urban branches in 14 months, an average of ~160 offices per month vs. 38 in the three preceding years).

• Cautions that branch expansion must be matched by training of branch managers, choice of locations, inspection, and Head Office co‑ordination — over‑rapid expansion risks placing untrained managers in charge of a decentralised operation.