Fourteen major commercial banks of India were nationalized recently. It was observed that the banks had failed to play any positive role in the economic growth of the country. They existed as commercial units with the basic motive of profiteering rather than as effective instruments in the planned development of the nation’s economy. They mobilized deposits only to finance a few monopolistic industries run by a handful of business magnates. Quite often they gave loans for speculation, hoarding, black-marketing and other anti-social activities. Neither agriculture nor small-scale industry that held the key to the country’s progress was given any encouragement. Often they garnered rich deposits from semi-urban areas or from backward states only to invest them in some profitable, but not essential industries located in big cities in technically advanced states. The scheme of social control failed to give the right direction to our banks. Consequently, fourteen major banks, each with a total deposit business of over Rs. 5000 crores, were nationalized. The preamble to the Banking Companies (Acquisition and Transfer of Undertaking) Act, stated that the objective of bank nationalization was to serve better the needs of development of the economy in conformity with national policy and objectives. Subsequently, six more banks were nationalized recently.
With the nationalization of commercial banks, the banking industry in our country has become virtually a government monopoly. The government now controls nearly 92 per cent of deposits of scheduled commercial banks. It will enable the government to exercise a better control over the financial activities of these banks and the government will be in a position to implement its credit policies more vigorously.
The objective behind the nationalization of banks was to exercise a full control over the banking industry in the country. It was stated that the government wants back to work as an instrument of economic development for backward areas and for financing weaker sections of society. With the nationalization, these banks will join hands with that other nationalized banks of the country in implementing 20-point economic programme, in raising the priority sector advances to 40% from 33% during the next 5 years, in utilizing 60 per cent of deposit resources locally, in raising differential rate loans up to 2 per cent of total credit and m opening more rural branches in underdeveloped and under-banked areas. The government wants to use the banks to implement its credit policies more vigorously and employ resources to further national priorities and socioeconomic objectives.
As we look back at the achievement of these banks, what catches our eye instantaneously is the spectacular branch expansion, particularly in the rural areas. We started with 16,321 branches with only 22 percent of them in the rural centres. This number had crossed 90,000. The percentage of branches in rural areas had gone up by more than two times. Care has to be taken that the new branches play their role in the generation of productive and employment opportunities all over the country.
Nationalization gave a great fillip to the mobilization of bank deposits. New branches particularly in the faraway villages tapped small financial resources, helping the villagers to inculcate the habit of saving money and inverting it in essential development projects. In four years after nationalization, the total deposits had more than doubled.
The expansion of bank credit generally goes hand in hand with the expansion of bank deposits. However, for the first few years after nationalization, the bank credit expanded recklessly, probably under implicit or explicit policy directives from the Government. It far exceeded the expansion of bank deposits. But later some kind of balance was achieved. The on of creditable aspect of this situation is that it is the priority sectors that have most benefited by the liberalized loan policy of die commercial banks.
With nationalization, the banks came to recognize their role as major instruments of development effort. They gave up their traditional role of earning huge profits for the shareholders and began to devote themselves to the development of priority sectors. The Lead Bank Scheme introduced recently was aimed at harnessing the potential of banking institutions and making them serve the economy.
Later, the Government introduced the Differential Interest Rates Scheme. Under this scheme, the public sector banks were instructed to give loans at a concessional interest rate of 4 per cent to the weaker sections of the community, who had no tangible security to offer but who could improve their economic condition through financial assistance from banks. Now, fresh guidelines have been issued to the banks to enhance the utility of this scheme; The banks operating this scheme will now make it certain that not less than two-thirds of their advances under this scheme are routed through their rural and semi-urban branches. They will also ensure that not less then one third of the banks credit under the scheme will flow to eligible borrowers belonging to scheduled castes and scheduled tribes. These directions will enable the weaker sections of the society in the rural areas to derive maximum benefit under this scheme.
The banks have started playing a vital role in our export promotion programme also. After the immoderate rise in the price of oil, it has become essential to give priority to our exports, otherwise our economy would suffer front an acute imbalance of payments. The Industrial Development Bank of India, in association with commercial banks, makes direct advances to exporters of capital goods and machinery. These steps have given a great boost to our exports.
Nationalization of the banks was a wise step or it was unwise, is net a debatable issue at this juncture. Since it has now been done, we must only try to ensure that these banks do not become a victim of the poor customer service and red-tapism as is the case with the Nationalized banks. Of late, a cumber of commercial banks, have been indulging in ugly wasteful competition in the matter of branch expansion and deposit mobilization. It is strongly felt that quantitative expansion in banking business has been matched by qualitative improvement. In fact, it has been brought about at the cost of some qualitative deterioration—deterioration in organizational strength, in service and efficiency, even in the quality of assets. It is also sad to observe that the real benefits of banking have not satisfactorily percolated to the weaker sections of the society. The banks have a commitment to the nation and they should streamline their functioning to fulfill it. The government should make use of this instrument in the larger interest of the society. The step of the government was a daring one and rightly it can be named as a historic step.