Social Control And Nationalization Of

Banks :An Evaluative Analysis

Debayan Sen
LL.M Trimester II
Role No.13
1 30/01/2015

Introduction

India adopted a socialist pattern of society

after independence. The constitution in
itself is a social document where an
egalitarian state has been envisaged.
Achieving these goals has been to
impose State control over the banks in the
1960s and can be analyzed through two
main events, one the Social Control in
1968 and Nationalization in 1969.

Objectives
To analyse the backgrounds leading upto Social Control and Nationalization of
the banks.
To analyses the impact of social control and nationalization of banks on the
economy and the Indian society.
To assess the importance of Nationalised banks on the economy after the post
liberalized period.
To assess the relevance and significance of bank nationalization in the
liberalization period.
Problem
The following research project focuses on the relevance of bank nationalization
in the current globalised period.
Hypothesis:
The hypothesis of the research project is that there is a need for a more modern
approach to the concept of Nationalization for the betterment of the economy.
The banks should be given more autonomy in their governance than what they
are getting now.

Banking Scenario Prior to

Nationalization

The private sector banks being predominantly urban oriented and controlled
by few large industrialists were not properly equipped to help the achieve the
basic socio-economic objectives.

The chairmen of these banks were mostly industrialists and were only interested in
sanctioning large amounts of loans to the respective industries they were connected

The priority Sectors were neglected and loan advances were forwarded to the
industries close to the banks

The bulk of the deposits mobilized was advanced to the industry

sector and the priority sector agriculture received barely 1%.
In absence of financial institutional protection, the agricultural credit
scene was dominated by private moneylenders charging exorbitant
rate of interest.

To overcome these deficiencies found in the working of the banks, the Banking
Laws (Amendment) Act was passed in December 1968 and came into force on12-1969. It is known as the scheme of 'social control' over the banks.

Social Control Of Banks

In the post independence period it was observed that the banks were
directing their advances to the large and medium scale industries and the
priority sectors such as agriculture, small-scale industries and the exports
were neglected.
To overcome these deficiencies found in the working of the banks, the
Banking Laws (Amendment) Act was passed in December 1968 and came
into force on 1-2-1969.
Notable sections 10A,10B,10C,10D

Reconstitution of Board of Directors i.e.51% of them should have

specialized

knowledge

on

accountancy,

agriculture,rural

economy

,banking, cooperation, economics, finance,law,small scale industries and

other matters useful to the banking company.

Appointment of a whole time chairman.

Imposition of restriction on loans to be granted to the directors concern.

The scheme also provided for take over of banks by the Govt.
under certain circumstances.

National credit council was setup to perform certain specific

functions relating to credit to priority sector.

The major objectives,

wider spread of bank credit,

directing large volume of credit flow to the priority sector and

reducing the authority of the members of the managing

committee ,since they acted as the representatives of the
industrialists.

Nationalization of Banks and its effects

Barely four months after the Social Control , the government

nationalized 14 major banks which held a deposit of around Rs 50
crores on 19th July 1969 and 6 more banks which held deposit of
around Rs 200 crores on 15th April 1980.
Promulgation of the banking companies (Acquisition and Transfer
of undertaking) ordinance 1969. on July 19,1969 under which 14
commercial banks with deposits over Rs.50 crore each were
Nationalized.
Objectives of Nationalisation that can be underlined as follows:
To control the commercial heights of the economy
To extend banking facilities to unbanked and under banked centers,
especially in rural areas
To ensure an increased flow of assistance to the neglected sectors
To foster the growth of new and progressive entrepreneurs

The two decades since nationalization of banks witness the

transformation of the Indian banking scenario. The total number of
branches, which were 8000 in 1969 increased to 60,000 in 1990.
Such kind of expansion was the most rapid in rural sector.
The share of rural offices has increased from 17.6% in 1969 to 56%
in 1990.
The share of rural areas in total deposits rose from about 3% to
15% in the same period.
The rise in share of credit was spectacular from 1.5% in 1969 to
6.3% in 1989.
In all the two decades since the nationalization of commercial
banking in India saw banks being taken from its urban confines to
vast rural stretches. The expansion of banking into rural areas
meant a phenomenal expansion in terms of number of deposits and
loan accounts.

The total number of loan accounts shows a rapid increase

from about 4 million in 1970 to 60 million in 1990.
In terms of agriculture accounts the increase was about 1
million in 1970 to 10 million in early 1980.
Transport and trade also show significant increase.
Totally neglected areas like small artisans, small scale
industry also gets a significant place.
By early 1980s the share of agriculture in credit has risen to
17%, transport operators about 5% and small scale sector
about 12%.
The regional distribution of branches was also shifted away
from Maharashtra, south India and Gujarat to rest of the
country.

The sharp increase in cash reserve ratio from about 8.3% to

16.8% during the period of 1977 to 1990s.
It is much evident that initial result of taking credit to rural
areas was taking money out of banks but much later with the
development of deposit habit that cash outflow tend to
decrease. Therefore the nationalization of banks had and
still has a great effect on industry banking industry.

Arguements for:
The intervention of the state raised the morale of the
customers eliminating suspicion.
Banking ceased to be selective. The entry barriers that
existed for customers to bank, social economic and political
were lowered.
Reach of banking widened. Absence of concern for
profitability and targeting made banks to expand rapidly in
un-banked areas
A large employment base was created.
Development of Banking habits

Failures of Nationalization

Deterioration in the services of the banks.

Failure to mobilize adequate deposits

Failure to provide competent and efficient bank staff

Neglect the priority sectors.

Trade union disputes

Political influence

Relevance of Nationalization post

1990

On the basis of the major recommendations of the Narasimham

Committee on Financial System (1991), the Government of India
introduced certain Banking Sector Reforms from the fiscal year

1992-93

. The capital of the nationalised banks is inadequate in relation to

the risk assets and the off-balance sheet liabilities.
According to Finance Ministry of India estimate the NPA was
running into crores of rupees.
The initial steps The Government of India took was of fixing the
lending rates and deposit rates and reduced the interest margin
slowly and gradually.
the govt. did not accept the recommendation of reducing the priority
sector lending
The list of Priority sector was incresed

The govt. also allowed foreign banks to operate in India

Indian Private banks were also granted permission to operate.
ICICI has become the largest private bank in India and the
second most profitable bank in India.
Foreign pvt. Banks like HSBC,RBS ,ABN AMBRO etc too are
operating efficiently and earning profits
Entry of pvt. Banks and foreign banks diversified the whole
economy and expanded it rapidly.
They are forcing the Government Banks to adopt modernized
technology.
National banks like the SBI are rapidly adopting technology in
their operations and has been benefitted immensely due to it.

Conclusion

Nationalization of the banks is one of the landmark economic policy

in the history of Independent India and has been able to transform
the crony attitude of the erstwhile banks.
Now there is a need to have another reform
Banks are requesting the govt. to reduce the public stake below
51%
RBI is also asking the govt. to privatize the banks and grant them
more autonomy in their operations.
Suggestion
India needs a moderate approach privatizing the banks. Autonomy
is needed or else it will lead to paralysing the whole policy
decisions.
A cautiousness must also be taken so that crony capitalistic ideals
didnt creep up

Thank you