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On the 50th anniversary of bank nationalization, here are some excerpts from @ShankkarAiyar's 2013 book, "Accidental India".
I'll include some non-banking snippets first, though.
1/
This is 1991.
"The sequence of events that followed provides a fascinating insight into the world of geopolitics. On Friday, 4 January, the deal was more or less tied up. On 6 January, Swamy declared that the IMF had agreed to give India a loan."
2/
"On 9 January, the Government of India agreed to allow US war planes to refuel in Bombay. On 17 January 1991, while America bombed Iraqi forces, Prime Minister Chandra Shekhar declared that the US decision to attack Iraq was right..."
3/
"... and the US state department, almost on cue, welcomed the Indian stand. A day later, the IMF cleared a loan of $1.03 billion under the Compensatory and Contingency Financing Facility to meet India’s immediate needs and earmarked $789 million as the first tranche of a standby"
" arrangement.
...
Which is why Yashwant Sinha claims paternity for the liberalization of 1991, although unfortunately for him the government he was part of couldn’t pull it off."
5/
On to Bank Nationalization...
"In 1951, there were 566 banks in operation but by the early sixties barely 100 were left standing. The regular failure and closure of banks—nearly forty a year—led to suspicions of malfeasance, that banks were not only not contributing to the common public good..."
6/
"but were perhaps actually defrauding society at large. The demand for state intervention was but a natural corollary.
The govt found itself short of money to fund the Third Plan. The political class..was convinced that socialism could not be funded without controlling the banks"
"While the government could, in theory, borrow from banks, this was limited by the appetite of banks for government bonds and more importantly, the total savings available with the banks in question."
7/
" The cache of savings could only be expanded when banks were pushed to open branches in rural and semi-urban areas to tap into public savings, savings that were otherwise being mopped up by companies and by usurious moneylenders in the informal money market."
8/
"[freedom fighter Subhadra Joshi, 29 March 1963]
pointed out that of the combined total of 5,111 branches of all the banks then operating in India, only 657 were in rural India."
9/
"Joshi was followed by Prabhat Kar, an MP from Hooghly who declared that the All India Bank Employees’ Association had been demanding the very same thing for six years."
10/
"Among those who supported Joshi’s initiative were a large number of Congressmen and the Young Turks led by Chandra Shekhar. TT Krishnamachari, then minister of finance, was one of the few who argued that nationalization by itself was not likely to provide additional resources."
"On 26 November 1963, after much deliberation within the RBI and much opposition from the Indian Banks’ Association, the government introduced the Banking Laws (Miscellaneous Provisions) Bill in the Lok Sabha."
12/
"Under the proposed amendments, chairmen and CEOs of banks could no longer be appointed in perpetuity or for indefinite periods. The bill empowered the RBI to remove from office any director, CEO, or any officer or employee if the removal was in the public interest."
13/
"On 6 June 1966, India devalued the rupee from 4.76 to 7.50 to the dollar, a drop of 57 per cent, the biggest devaluation ever in its history. Indira Gandhi defended the decision, matter-of-factly stating that if the rupee wasn’t devalued, essential aid would be denied."
14/
"Morarji Desai was clearly against the idea of nationalization. His argument was that banks were custodians of public monies and no bank—public or private—could abandon the test of viability while lending."
15/
"The total num of branches were just 6,500 & whatever branch expansion had happened, had come about only under the pressure of the RBI. It went on to reveal that at the end of March 1966, banks had lent only 90 crore to the small-scale sector as against 1,300 crore to big biz."
"The banks had lent just 5 crore to agriculture (under 1 per cent of total advances)."
17/
"In October 1968, a study group of bankers, economists and industrialists ... was constituted ... to study various gaps in the geographical expansion of branches as also the sectoral expansion of credit. Its first report was damning."
"As many as 617 towns out of the 2,700 in the country had not been covered by commercial banks. Of these, 444 did not have cooperative banking facilities either. And, worse still, of about 600,000 villages, hardly 500 had banks."
19/
"Deputy Prime Minister Morarji Desai responded with the contention that money deposited in banks could not become government money by merely nationalizing banks and argued that the idea of social control deserved a fair trial."
"A few days before the critical AICC Session at Bangalore in 1969, she penned a document known as the Stray Thoughts Memorandum. Far from being stray, the document was a well-thought-through turn to the left to capture the reins of the party."
21/
"Borrowing heavily from the ten-point charter of the Young Turks, the note prescribed the abolition of privy purses, the nationalization of banks, the installation of a ceiling on urban and rural landholdings, a programme to deliver land to the tiller & a crackdown on monopolies"
"The objective, clearly, was to paint the Syndicate as anti-people and pro-rich and identify herself as pro-poor to woo the socialists and leftists who campaigned for state control of economic muscle. The tussle for power had now acquired an ideological aura."
23/
"Shortly after her return from Bangalore she summoned I. G. Patel, who was then heading the Department of Banking, and without any preamble asked him to prepare an ordinance for the nationalization of banks. The move to nationalize banks was her decision alone."
"Until Patel informed L. K. Jha, then RBI governor, even he did not know about it. And neither did Deputy Prime Minister Morarji Desai. On 16 July she simply sent him a letter divesting him of the finance portfolio,"
25/
"On 19 July 1969, the Banking Companies Ordinance was promulgated by acting President V. V. Giri in exercise of the power conferred by clause (1) of Article 123 of the Constitution. Ordinance 8 of 1969 transferred ownership of fourteen commercial banks to the State."
26/
"She did realize, though, that the big industrialists who owned the banks, and who had been robbed of their vested interests, could potentially play a role in the battle within Congress by funding her rivals. In a flanking move..."
27/
"she asked officials in the PMO to work with the home ministry on the Companies Act to draft an amendment banning donations by companies to political parties.Till 1969,when Mrs Gandhi banned it, companies were allowed to donate to political parties, officially,from their profits"
"In 1969, after 22 years of independence, the Indian banking system had ~ 6,900 bank branches. By 1979 India boasted 30,202 branches & by 1989 the number had increased to 57,699. Between 1969 & 1989 the number of branches in rural India, in villages, shot up from 1,833 to 33,014"
"To force the pace, a provision—dubbed 4:1—was employed under which banks were required to open four new branches in areas without coverage for every new branch opened in an area with banks. The avg no of customers per branch, 63,000 in 1969, was down to 14,000 in 1989."
30/
"Thanks to branch expansion and the democratization of banking services, the country’s gross savings shot up from 11.8 per cent of the GDP to 21.2 per cent in two decades."
"In a comprehensive study, Robin Burgess and Rohini Pande reveal that between 1969 and 1990, branches were set up in 30,000 rural locations and this led to rural savings rising from 3 per cent to 15 per cent and the share of credit to rural areas from 1.5 per cent to 15 percent."
"It is their considered argument that branch expansion in rural areas can explain roughly half of this fall in rural poverty. Their contention is that lack of access to finance is an important reason why poor people stay poor."
33/
"from 1991 to 2011, ... only 30,000 bank branches were added. Contrast this with the twenty years between 1969 and 1989 when banks added over 50,000 branches... Between 1969 and 1989, banks added 31,181 branches in rural India while between 1991 and 2011 less than 1,000 branches"
"Historically speaking, the 1980 round of bank nationalization was ironic. The ordinance was promulgated by N. Sanjiva Reddy. The man whose candidature had triggered the first round of nationalization and the split in the Congress was, in 1980, the President of India."
35/35
The snippets in this thread are from @ShankkarAiyar's hugely informative book, "Accidental India- A History of the Nation’s Passage Through Crisis and Change"
amzn.to/2JO5PgZ
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