Commercial banks: nationalisation, reform and consolidation

Commercial banks accept deposits from the public and lend to households, firms and governments, earning mainly from the difference between lending and deposit rates. In India they include public sector banks, private banks, foreign banks, regional rural banks and small finance banks, all operating under the Reserve Bank's regulation. Public sector banks dominate in branch network and deposits in many regions, while private and foreign banks are stronger in urban and corporate segments. Understanding this structure helps explain both credit access and banking crises.

Bank nationalisation reshaped Indian banking. On 19 July 1969, fourteen major commercial banks were nationalised, and on 15 April 1980 six more followed. The stated aims included extending banking to rural and neglected areas, directing credit to agriculture, small industry and other priority sectors, and reducing concentration of economic power. Branch expansion did widen access, and priority sector lending requirements directed a share of bank credit to agriculture, small enterprises and weaker sections. Critics argued that political interference, weak appraisal and loan waivers later weakened bank balance sheets.

The Narasimham Committee reports of 1991 and 1998 recommended greater competition, prudential regulation, capital adequacy, asset classification and a reduction in statutory pre-emptions, alongside entry of new private banks. Reforms from the 1990s opened banking to private and foreign competition, strengthened supervision, and introduced modern risk management, but public sector banks continued to carry a large share of infrastructure and priority lending. From 2019, the government consolidated public sector banks, reducing their number to twelve, with the stated aims of scale, efficiency and stronger balance sheets. Consolidation can create larger, better-capitalised banks, but it can also reduce local presence and competition if branches close or cultures clash.

The continuing debate is about the right balance between social objectives and commercial soundness. Banks are expected to serve development goals, remain profitable, protect depositors and avoid excessive risk at the same time. When those goals conflict, as in directed lending or politically popular loan relief, the costs eventually appear as bad loans or recapitalisation from the budget. That tension is the central theme of Indian banking reform.