Public banks and financial intermediation in India: The phases of nationalization, liberalization and inclusion

The author looks at one of the biggest public banking sectors in the world from a historical perspective. Besides supporting employment-intensive sectors such as agriculture and small enterprises, Indian banks are charged with reaching out to a great number of people without bank accounts, especially in rural areas, since the broad-based nationalization of banks in the late 1960s. Until the financial liberalization phase in the 1990s, branch outreach increased rapidly and bank credit became much more accessible in agriculture. The expansion of public banking was accompanied by a striking increase in national savings and investments. However, the policy of financial liberalization brought about a reversal in most of these accomplishments. The policy of financial inclusion and low interest–bearing loans to address agrarian distress resumed after 2005, but also included bulky loans to infrastructure and core industrial sectors with a higher propensity for default. Rejecting the call for privatization, she asserts the need not only to preserve the public character of these banks by way of recapitalization given their role in financial inclusion but also for professional and transparent management of these banks.