Legacy of PSU Banks

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In the year 1969, The GOI under the leadership of Indira Gandhi issued an ordinance and nationalized the 14 largest banks in India to take control of the credit system and direct money flows into areas of the economy which fit the government's agenda of growth. In 1980, a few more banks were nationalized and by this time, with the existing ownership of State Bank of India and it's associates the GOI controlled more than 90% of all credit.

Since the Government of India owns the majority stake, there was a lack of competition, innovation, efficiency and drive to become better. Decades of monopoly had made these banks complacent and needed a reality check to get back on track. With the liberalization policies of the government and granting of new banking licenses to private players in the mid 1990s, the sector witnessed enormous competition and a lop-sided growth in which private sector banks grew very rapidly. The circumstances of rising bad loans which has struck the banking sector and in particular the PSU banks in the last few years has now forced the Government to focus on reforms.

The government actions will determine if the legacy of PSU banks will continue financing the growth of the Indian economy in a healthy manner and whether there will be a turnaround going forward.

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