Short notes on Social Control over Banks

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The banks are the custodians of savings and powerful institutions to provide credit. They mobilise the resources from all the sections of the community by way of deposits and channelise them to industries and others by way of granting loans. In 1955 the Imperial Bank of India was nationalised and SBI was constituted.

It was observed that the commercial banks were directing their advances to the large and medium scale industries and the priority sectors such as agriculture, small-scale indus­tries and exports were neglected.

The chairmen and directors of banks were mostly indus­trialists and many of them were interested in sanctioning large amount of loans and ad­vances to the industries with which they were connected.

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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. It is known as the scheme of ‘social control’ over the banks.

The then deputy Prime Minister, Mr. Morarji Desai made a statement in the Parliament on the eve of introducing the bill to amend the banking laws Act.

He explained that the aim of social control was, “to regulate our social and economic life so as to attain the optimum growth rate for our economy and to prevent at the same time monopolistic trend, concentration of economic power and misdirection of resources”.

The following are the main provisions of this amendment,

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Bigger banks had to be managed by whole time chairman possessing special knowl­edge and practical experience of the working of a banking company or of finance, economics or business administration.

The majority of directors had to be persons with special knowledge or practical experience in any of the areas such as accountancy, agriculture and rural economy, banking, co-operative, economics, finance, law, small scale industries etc.

The banks were also prohibited from making any loans or advances, secured or unsecured to their directors or to any companies in which they have substantial interest.

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