Bank Nationalisation and the associated public policies on banking and financial sector development were predicated on the strong assumption of the need for promoting financial intermediation by building institutions, expanding their geographical spread, mobilising savings, and ensuring a better regional, sectoral and functional reach of institutional credit in India. Such a system of supply-driven institutional development could neither be left to market forces nor to the initiative of private entrepreneurs. Also, the broad objectives of banking, as set out above, were intertwined, for one could not be achieved without the success of others. The functional reach of credit, for instance, could not be attained without the geographical spread of banks as well as mobilisation of local savings.
Even the ardent critics of India’s growth strategy would admit that what the country achieved in the area of financial sector development before the present reform process began, particularly after bank nationalisation, was unparalleled in the financial history of any other nation in the world.
The presence of nearly 62,000 Commercial bank branches in the country, of which over 35,000 (or over 58 percent as of March 1991) were in rural areas, within a short span represented an unprecedented growth of commercial banking in terms of both geographical spread and functional reach.
Second, combined with the expansion of the bank branch network, steady increases were recorded in the share of rural areas in aggregate deposits and credit. From 6.3 percent in December 1969, the rural deposit share touched 15.5 percent in March 1991 and the credit share rose from 3.3 percent to 15.0 percent. More significantly, with the target credit-deposit (C-D) ratio set at 60 percent, the C-D ratios of rural branches had touched 64-65 percent on the basis of sanctions. In fact, if migration of bank credit from the place of sanction to the place of utilization is taken into account, the C-D ratio for rural branches had ranged from 85 percent to 97 percent by March 1991.
Third, three historically under-banked regions, also underdeveloped economically, namely, north- eastern, eastern, and central regions, had received special attention in the branch expansion programme of scheduled commercial banks until the 1990s. These three regions, accounting for about 50 percent of the country’s population, had about 25 percent of bank branches in 1969. By March 1992, their proportion of bank branches had shot up to 42.6 percent and the number from a total of 2,068 branches to 26,439. Alternatively, the proportion of bank offices located in relatively under-banked states or BIMARU (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) states improved during the period from 23.0 percent to 34.0 percent. This improvement is also reflected in a sizable reduction in the average population covered by each bank office in the under-banked and moderately-banked states. Besides, it is in these backward states that the shift in the share of bank branches in favour of ‘rural’ areas has been much more pronounced. Another factor which is claimed in official circles to have contributed to an improvement in C-D ratios of regions and states has been the banks’ effort to supplement bank credit by investment in securities and bonds of state governments and state-level institutions like electricity boards, improvement trusts, local boards and others. This occurred to a greater extent in underdeveloped states than in the relatively developed states.
Fourth, the improvement in banking development in the post- nationalisation period was reflected in many districts sporting noticeably higher growth in bank deposits, higher credit growth and improved C-D ratios. A classification of all the districts in the country and their rural branches by the size of their credit-deposit ratios confirms the phenomenon of a growing number of districts in various regions having experienced noticeable improvements in their ratios of credit to deposits until the beginning of the 1990s. The number of districts enjoying C-D ratios of 60 percent and above shot up from 136 in March 1980 to 209 in March 1985; thereafter it remained in the range of 163-177 until March 1992. Such improvement took place in rural centres of districts too.
Fifth, sectorally a major achievement of the banking industry in the 1970s and 1980s was a decisive shift in credit deployment in favour of the agricultural sector in particular. From an extremely low level of 2.2% at the time of bank nationalisation, the credit share of the sector had moved to nearly 11 percent in the mid-1970s and to a peak of about 18 percent at the end of the 1980s which was the official target set.
Sixth, next to agriculture, the small-scale industrial sector occupies a pivotal position in terms of employment and output share in the economy. Apart from sectoral dispersal and wider promotion of entrepreneurship, the small-scale industries have a regional dimension in that the SSI units are scattered all over the country. Immediately after the introduction of social control and subsequent bank nationalisation, banks found the small-scale industries a lucrative target for lending. Hence, the share of SSI units in total bank credit shot up from 6.9 percent in June 1968 to 12.0 percent in June 1973. Thereafter, the share was sustained in the range of 11 to 15.3 percent until the 1990s.
Finally, data on the trends in the number of borrowal accounts – overall and small borrowal accounts – are reflective of a similar positive trend. Immediately after bank nationalisation and for the next two decades, there occurred an upsurge in small borrowal accounts. Between December 1972 and June 1983, there were 21.2 million additional bank loan accounts nursed by the scheduled commercial banks, of which 19.8 million or 93.1 percent were accounts with credit limits of Rs 10,000 or less. This trend continued for another decade up to March 1992 (despite the loan waiver scheme effective March 15, 1990).
With a view to taking account of the impact of inflation, the cut-off limit for small borrowal accounts in the RBI’s reporting system was raised to Rs 25,000 in December 1983. Between December 1983 and March 1992 when there were another 38.1·million of additional total bank accounts, the number of small borrowal accounts with credit limits of Rs 25,000 or less increased by 36.0 million or almost 95 percent of the total increase.
This ability of the scheduled commercial banks to service small borrowal accounts – a peak of over 62.5 million with credit limits of Rs 25,000 or less from various sectors and regions of the economy, could be said to be one of the outstanding achievements of bank nationalisation. It is this aspect of banking development that aroused the aspirations of the common man and gave him a sense of participation in the development process.
Above all it reduced the income inequality across the country. In 1990 earnings of the top 1% came down from 21% in 1940 to 6%. The bottom 51% grew at a faster rate.
The following steps lead to this.
- Average Deposit rates increased from 6% to 10%
- Maximum lending rate was fixed at 16%
- 1969- Lead bank scheme was launched giving responsibility to one bank in every district. SBI was given responsibility in maximum backward districts including most of North East.
- 1972- Priority Sector lending norms were introduced.
- 1972 -Banks were asked to lend 1% of their total loans at 4% simple rate of interest to the weakest section of the society. (When SB Interest rate was 5%)
- 1973 -District Credit Plans came into existence
- 1975 -The borrowers were asked to bring in at least 25% of working capital gap.
- 1976 -Maximum lending rate was fixed by RBI
- 1988 -Service area approach was introduced, allocating service villages to every bank branch covering the entire country.
- Cash Reserve Ratio was steadily increased making money available with RBI.
- Statutory Liquidity Ratio was steadily increased, paving way for Govt to mobilise funds through Govt bonds.
So the objectives of Nationalisation were definitely achieved.
And look, what is happening now?
Banks have been asked to lend up to five lakhs for Covid treatment paving way for private hospitals to loot the patients with unwanted tests, CT scans, steroids, ICU etc. leading to further complications including black fungus and death. Where are we heading? Why don’t we look at History ?
Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.
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