Sixty years ago, in August 1960, two large banks—the Lakshmi Commercial Bank and the Palai Central Bank of Kerala—failed in quick succession. The banking sector had no regulator then. The then finance minister Morarji Desai was having a gruelling time convincing the RBI to regulate the thousand-odd banks. The central bank refused to do so because it had limited staff and resources and did not have the legal mandate to regulate banks.
The finance ministry had already advised these banks to voluntarily consolidate two years ago, but there were hardly any mergers or acquisitions. Meanwhile, banks were falling like ninepins. Desai, who had been advocating self-regulation, was forced to make consolidation and amalgamation compulsory so that only strong banks that met the liquidity norms would be allowed to function.