Introduction
Social control without nationalization had no meaning and nationalization without social control could be a fraud.
“Our soul consideration has been to accelerated development and thus makes a significant impact on the problems of poverty and unemployment and to bring about a progressive reduction of disparities between rich and the poor sections of our people and between the relatively advanced and backward areas of our country.” -Smt. Indira Gandhi
The Indian banking system has made remarkable progress since independence. When India became independent on the 15th of August, 1947, it inherited the banking system which was patterned after the British Banking System. In those days there were many Stock Companies doing banking business and they were mostly concentrating in major cities and provincial headquarters. Since there were no uniform laws to govern the banking activities in the newly independent country, the princely states and provinces which were still under the British rule were amalgamated. The planning era which was assisted in the fifties was the starting point of the evolution of the Indian banking system as an instrument of economic change. The first step towards the evolution of the Indian banking system was the nationalisation of the Imperial Bank of India in 1955. Then in 1968, there was an imposition of social control on banks which was followed by the first instalment of nationalisation in July 1969. There was also the second instalment of nationalisation of banks in 1980. The second nationalisation has brought an overwhelmingly, large share of banking business into the public sector. The public sector banks made swift treads in extending the banking facilities, especially in rural areas because people living there have no idea how the banking system in India functions and also because a large number of areas where there is no access to the services of a bank or similar financial organization appeared on the banking map of the country. Efforts were made to identify centres for opening the branches and also preparing district level credit plans. In India, the experiment made by the banking industry is indeed unique and does not resemble the banking history of any country in the world.
Bank Nationalisation
Before nationalisation, the entire banking system was in the hands of the private sector. Most of the privately-owned banks were in the form of joint-stock companies controlled by big industrial houses. More importantly, there have been several bank failures thanks to imprudent bank lending
within the absence of regulatory safeguards. For instance, nearly 361 banks of varying sizes failed in India during 1947-1958. The failed banks were either amalgamated or ceased to exist.
Before nationalisation, the privately-owned banks mainly existed in metropolitan cities, urban and semi-urban areas. The population covered per branch was 136,000 in 1951. The bank lending was mainly concentrated in a few organised sectors of the economy and limited to big business houses and large industries. Whereas farmers, small entrepreneurs, labourers, artisans and self-employed were dependent on informal sources, mainly traditional money lenders and relatives, to meet their credit requirements. The share of agriculture in total bank lending was a meagre 2.1 per cent during 1951-1967.
In 1967, the Indian government introduced the policy of social control over banks. The objective of this policy framework was to bring structural changes in the management of banks by delinking the nexus between big business houses and big commercial banks. Under this policy, new guidelines on the management of banks were issued to ensure that persons with specialised knowledge and experience could join the board of directors of a bank. The Reserve Bank of India also got new powers to appoint a bank. Another policy objective of social control was to improve the distribution of credit agricultural and developmental sectors. Despite such policy measures anticipated under the social control framework, a large segment of the population had no access to the institutionalized credit. Based on this largely failed experiment, the government realized that the nationalization was the only option to channelize banking resources to the neglected sectors of the economy and rural areas. There were several policy objectives behind the bank nationalization strategy which incorporates the geographical and functional spread of institutionalized credit, mobilizing savings from rural and remote areas and reaching out to neglected sectors like agriculture and small-scale industries. There was another policy objective which was to ensure that no viable, productive business should suffer for lack of credit support, irrespective of its size. Therefore, the bank nationalisation drive was inspired by a larger social objective to sub-serve national development properties.
The positive outcomes – At the time of nationalization, scheduled commercial banks had 8,187 branches throughout the country. However, the branch network increased to 59,752 in 1990. With such a rapid increase in bank branches across regions, the population covered per branch, which was 65,000 in 1969, also decreased to 13,756 in 1990. In 1990, out of 59,752 bank branches in the country, 34,791 were located in rural areas. The share of rural branches was 17.6 per cent in 1969. The massive expansion of bank branches in the rural and unbanked areas was the result of 1:4 licensing policy of 1977 under the nationalisation regime. Before nationalisation, branch licenses were issued on the financial strength of the banks. The 1:4 licensing policy changed the focus to providing banking services throughout the country, particularly in remote and unbanked areas. Under the 1:4 licensing policy, banks were given the incentive to open one branch in metropolitan and one branch in urban areas, provided they open 4 branches in the rural areas. This policy led to
a rapid climb of bank branches within the rural and remote regions of the country and thereby helped in correcting the urban bias of the banking system. Between 1977 and 1990, quite three fourths of bank branches were opened within the unbanked areas.
Social control over Banking
The concept of social control is a terminology coined by political pundits. Social control as it was then understood means, two things in particular: 1) social control includes nationalisation; 2) social control is intended merely to enable banks to channel their resources to priority sectors. However, many understood it as control over commercial banks to achieve or promote socialism or control in the interest of achieving a socialistic pattern of society. It is necessary to bring most of the banking institutions under social control to serve the cause of economic growth and fulfil our social purposes more effectively and to make credit available to the producer in all fields where it is needed.
If social control means state ownership of the banking system, through greater participation in the working of commercial banking institutions, it will only be putting a premium on state capitalism in the banking field. If on the contrary, social control is interpreted to imply greater regulation of the investment and advance portfolios of banks to meet the needs of the community, the Reserve Bank of India already has the necessary powers and is exercising them through its policy of credit control in the busy and slack seasons.
The scheme of Social Control: The scheme of social control over India’s commercial banks was announced by the government of India on 14-12-1967. The Deputy Prime Minister and Minister of Finance made a statement in the Lok Sabha declaring the views of the Government and how it proposed to impose the social control. Two main steps were taken: 1) setting up of a National Credit Council, NCC, and 2) introducing legislative controls by amending the Banking Regulation Act.
1) National Credit Council (NCC) – This council was set up under a Resolution of the Government and its functions were broad – a) to assess the demand for bank credit from various sectors of the economy; b) to determine priorities for grant of loans and advances and investment having regard to the availability of resources and requirements of priority sectors, in particular,
agriculture, small-scale industries and exports; and c) to coordinate lending and investment policies as between commercial banks and cooperative banks and other specialised agencies to ensure the optimum and efficient use of overall resources. The N.C.C consisted of 25 members of whom 5 were permanent members – The Finance Minister as the Chairman, the Governor of the
Reserve Bank as the Vice-Chairman, the Deputy-Chairman of the Planning Commission, the Secretary, Finance Ministry (Department of Economic Affairs) and the Chairman of Agricultural Refinance Corporation, were the five permanent members. The remaining 20 were appointed by the government to secure adequate representation from various sectors like commercial banks, cooperative sector, large and medium scale industries, agriculture, trade including export trade and other professional groups including economists. However, the Council now remains dissolved since the nationalisation of commercial banks.
2) Amendment of the Banking Regulation Act, 1949 – The element of social control was introduced in the banking system through an amendment in the Banking Regulation Act, 1949. The preamble of the Amending Act 58 of 1968 reads as under:- “An Act further to amend the Banking Regulation Act,1949, to provide for the extension of social control over banks and for matters connected therewith, or incidental thereto, and also to further amend the Reserve Bank of India Act, 1934 and the State Bank of India Act, 1955”. The additional controls and restrictions as imposed by the Amending Act can be broadly outlined as –
a) Constitution of the Board of Directors of Banking Company – the directors having special knowledge and practical experience in certain specified subjects relating to banking.
b) Management of the affairs of a depository financial institution by an entire-time Chairman, who has special knowledge and practical experience within the working of bank or financial, economic or business administration.
c) Restrictions on loans and advances by a banking company to its directors or to a company or firm in which a director is substantially interested or to an individual for whom a director is a guarantor.
d) Additional powers conferred on the Reserve Bank of India to enforce and supervise social control.
e) Punishment for obstructing any person from lawfully entering or leaving a bank, holding demonstration within a bank, acting the undermine depositor’s confidence in a bank.
f) Special powers of Central Government to acquire undertakings of banking company when it is specified on a report from the Reserve Bank that the banking company has committed certain defaults and that is necessary to do so.
Conclusion
I would like to restate that Nationalization happens when a government takes over a private organisation. Government bodies end up with ownership and control, and the previous owners or shareholders lose their investment.
In India through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalized the 14 largest commercial banks on 19th July 1969. These lenders held over 80 per cent of bank deposits in the country. Soon, the parliament passed the banking Companies Bill, and it received presidential approval on 9th August 1969.
Social control over banking was done to spread the bank credit, prevent its misuse and direct a larger Volume of credit flow to private sectors and to make it a more effective instrument for economic development.
In summary, I have come to an understanding that nationalization gave access to the commercial banking system. The commercial banks constitute the most important element in the economic life of the country and should serve to integrate the money market with the planning process to attain the optimum growth rate, prevent the monopolistic trends, the concentration of economic power and misdirection of resources. Whereas the objective of social control was about making banking sector accessible in areas where these services were not accessible, through two significant policy initiatives, and they are, branch licensing policy which certainly increased the spread of economic banks in rural areas, and priority sector lending targets allocated to banks achieved sectoral allocations like agriculture and little industries.
Anugraha Sundas
Jogesh Chandra Chaudhuri Law College, Calcutta University
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