The most important political and economic decision in the history of India, some would say, is not the establishment the Planning Commission or the liberalisation of 1991, but the nationalisation of private banks 50 years ago on this day.

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On July 19, 1969, Prime Minister Indira Gandhi took the decision to nationalise 14 top private sector banks in the country. It was a difficult time for Indira Gandhi. She was fighting a rebellion within her party and was yet to assert herself as a major force in Congress.

Here is a quick look at the sequence of events that led to the nationalisation of top banks.

On May 3, 1969, Indian President Zakir Hussain passed away and

Vice-President VV Giri assumed office as the acting President. Then Congress stalwart and finance minister Morarji Desai picked Sanjiva Reddy for the post of president; and Indira Gandhi backed VV Giri or Jagjivan Ram.

On July 12, 1969, Congress party headed by Nijalingappa declared Sanjiva Reddy as the presidential candidate against the wishes of the prime minister. Indira saw it as an assault on her authority and just four days later removed Desai as finance minister and assumed temporary charge of his portfolio.

Three days later, on July 19, 1969, an ordinance was passed to nationalise 14 banks. Acting President VV Giri signed the ordinance. Interestingly, this happened one day before he was to demit office as the parliament was about to convene for the monsoon session.

Giri eventually won the presidential race thanks to the support of regional parties and a faction of the Congress with DMK under Karunanidhi playing a pivotal role.

CNBC-TV18 spoke to former finance minister Yashwant Sinha, founder chairman of ICICI Bank Narayanan Vaghul and former finance minister P Chidambaram to look back at the decision to nationalise banks.

According to Sinha, there was a very strong economic logic for doing what Indira Gandhi did. "The banking system at that time was serving only a handful of people, largely in the cities, the metros, and a large number of people living in the rural areas were left untouched. So, it was an absolutely right step at that point of time. Those were the days of nationalisation of industries. We have come a long way since then and the current situation demands a totally different approach. However, this is what happens in the life of nations, something which is right at a given point of time is not so right at another point of time," he pointed out.

Vaghul agrees with Sinha's views. "Many of us really felt that it was a right decision from the economic point of view and in the initial years, it did achieve its economic objective by spreading the network widely across the country. Also, it entered into a new sphere of activities – agriculture and small scale industries. Certainly I think it seemed to work. However, over a period of time it failed to serve the purpose. But what is mysterious to me is everybody agreed even 30 years back that nationalisation did not achieve its objective, but no government wanted to intervene in the matter," he observed,

Chidambaram emphasised that the original decision was correct. "The decision was taken for a number of reasons. The banking network was a closed system; it was closed to the poor, it was closed to the needy. It only served the owners of the banks, the very rich. The branch network was so limited that millions of Indians had no access to banking service. The system was also channelising the savings of the poor and the middle class to favour the rich. So the decision to nationalise banks was absolutely correct. But I think the nationalisation lasted too long. We should have started amalgamation and some privatisation much earlier. There will be a few public sector banks, but many more banks will be in the private sector. I think that will be the development that is required 50 years after nationalisation," the former finance minister opined.

First Published:Jul 19, 2019 8:58 PM IST