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Social Control and Nationalization of Banks

Vasanth Kumar.C

Jr,M.Sc(Agri )

Dept of Agril. Economics

UAS GKVK Bangalore

17-12-2013

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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 achievement

of the basic socio-economic objectives.

The credit needs of agriculture ,small scale industries

and weaker sections were totally neglected.

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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.

All these compelled the imposition

of social control over banks in

1968.

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The social control scheme

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 director’s

concern.

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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.

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Situation after social control scheme

Created the tempo of branch expansion initially.

No significant achievement was made in channelizing adequate

credit to the priority and weaker sections.

In many banks, the policies were controlled by those ,who had

controlled these banks earlier.

The directions issued by the Government were ignored by many

banks.

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The consequent impact

The Government believed that social control was not sufficient to make the commercial banking system meaningful for socio economic development.

Bank nationalization was considered as the alternative solution.

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The Remedial moveDemand for nationalization of commercial banks was raised quite frequently in the past.

12 point programme was placed in the Bhubaneswar session of the congress party in 1964 to mitigate the entire range of economic and Social evils.

The Govt. did not accept that due to administrative difficulties and other consequential effects in the economy.However,social control was introduced on 1st February,1969 through the enforcement of legislative measures.

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Brief History of Indian Banking

Before the enforcement of Banking Regulation Act,1949

there was little control and regulation on banking business.

Results:Mushrooming Growth of public banking

companies.

Gradual liquidation of the act results-closure and

liquidation, Amalgamation of the banks into another.

Failure of the Palai central Bank in 1960-A turning point

in the Indian Banking Scenario.17/12/2013 10-33 10

Nationalization of Banks

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.

When the government of any country takes the ownership of

any industry or enterprise in its own hand, then this process is

known as nationalization.

The term social control does not mean nationalization of the

banks.17/12/2013 11-33

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The difference between social control and nationalization is that in nationalization both the ownership and control are taken up by the government, while in social control ownership does not rest in the government.

Social control implies restricted freedom to the bankers, it will give more powers to the central government and credit will be regulated for the social welfare.

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N 12-33 12

The main objectives of Nationalization

As set out by the then prime minister, smt.Indira Gandhi, were

Removal of control on banking business by a few industrialists:

Prior to nationalization many banks were controlled by private

business houses and corporate families. It was necessary to

check these monopolies in order to ensure a smooth supply of

credit to socially desirable sections.

Elimination of the use of bank credit for speculative and

unproductive purposes.

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Expansion of credit to priority areas which were grossly

neglected like agriculture and small scale industries.

Giving a professional bent to the bank management .

Encouragement of new classes of entrepreneurs.

Provision of adequate training as well as reasonable terms of

service to bank staff.

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N 14-33 14

Developing Banking Habits : In India more than 70%

population used to stay in rural areas. It was necessary to

develop the banking habit among such a large population.

Reducing Regional Imbalance : In India where we have a

urban-rural divide; it was necessary for banks to go in the

rural areas where the banking facilities were not available.

In order to reduce this regional imbalance nationalization

was justified

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14 Nationalized banks (1st spell)

1.central bank of India

2.Bank of India

3.Punjab National Bank

4.Bank of Baroda

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5. United commercial Bank

6.Canara Bank

7. United Bank of India

8.Dena Bank

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9.Union Bank

10.Allahabad Bank

11.Syndicate Bank

18-33 18

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12.Indian Bank

13.Bank of Maharashtra

14.Indian overseas bank

The 14 Banks together had 4,134 Baranches with deposits of

Rs.2,626 crore and advances of Rs.1,813 crore.

19-33 19

After 1st spell of Nationalization

Between June 1969 and June 1975, 8,755 offices were

opened by public sector banks, of which 4,337 offices

were in urban areas.

The number of public sector bank offices went up from

6,596 in June 1969 to 15,077 in June 1975.

The average population served per bank branch declined

markedly from 65,000 in June, 1969 to 32,000 by June,

1975.

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N 20-33 20

Second spell of Nationalization

Encouraged by the success of first spell of nationalization of banks, six more banks in the private sector, having deposits more than Rs.200 crore were nationalized on 15th April 1980.

The six banks were,

1.Punjab & Sind Bank

2.Andhra Bank17/12/2013

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N 21-33 21

3.New Bank of India

4.Vijaya Bank

5.Oriental Bank of Commerce

6.Corporation Bank

In 1993,The New Bank Of India was merged with

Punjab national Bank consequent to which Nationalized Banks stands as on Today 19.

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N 23-33 23

Arguments in favour of nationalization of banks in India

Prevention of trade cycles: a/c to Keynes,

banks plays a very important role at the time of boom (or) depression.

The boom and depression follow each other at regular intervals.

fluctuations harm to the economy of the country.

it is essential to exercise control on these business fluctuations in the interest of the healthy development of the economy the government can keep the effective control on the volume of credit only if the banks are nationalized.

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N 24-33 24

Improvement in efficiency.

Socialistic pattern of society.

Effective economic planning.

Security to depositors.

Removal of inter bank competition.

Utilization of bank credit in national interests.

Encouragements to savings.

Utilization of banks profit in national interests

Development of specialized banks.17/12/2013

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N 25-33 25

Arguments against nationalisation of banks

Lack of able, efficient and experienced employees.

Adverse effects on the development of private sector.

Lack of financial secrecy.

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N 26-33 26

Achievements of nationalized banks

The main achievements of the nationalized banks Expansion of bank branches Financial accommodation to the neglected

sections Financial accommodation to the unemployed

youth. Loans to sick industrial undertakings District survey for banking development

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Failures of nationalized banks

Deterioration in the services of the banks.

Failure to mobilize adequate deposits

Failure to provide competent and efficient

bank staff

Neglect the priority sectors

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N 28-33 28

Evolution Stages

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Banks in agricultural sector

Nationalization of banks was a major step for channelizing credit to various sectors of economy of which agriculture is a major sector.

A dynamic and growing agricultural sector needs adequate finance through banks to accelerate the overall growth.

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N 30-33 30

Flow of credit to Agriculture

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N 31-33 31

The target for agricultural credit in 2013-14 is Rs7,00,000 crore.

References

http://indiabudget.nihttp

http://finance.indiamart.com

http://www.rbi.org.in

http://www.epw.in

http://www.hindu.com

https://www.youtube.com

http://www.preservearticles.com

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THANK YOU

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