Sharing is caring!

When India attained Independence in 1947 it inherited a weak, desperate and unwieldy banking structure. Other than the Imperial Bank of India, there were many Indian joint stock banks, but they did not have adequate capital and due to unhealthy business practices 205 banks went out of business between 1947 and 1951.

After Independence

The Banking Companies Act 1949 was amended 10 times between 1950 and 1967 in a bid to strengthen the banking system. As a result between 1960 and 1969 there were 48 compulsory mergers, 20 voluntary amalgamations, 17 mergers with the State Bank of India, 125 transfers of assets and liabilities, all involving 210 banks. The number of banks was 567 in 1951, which came down to 295 in 1961 and finally to 91 in 1967.

Focus On Co-operatives

The historic All India Rural Credit Survey carried out in 1954 showed that formal credit institutions provided less than 9% of credit needs in India. Moneylenders, traders and rich landlords handled more than 75% of rural credit. Between the 1950s and 1960s a way forward was possible through co-operative societies. Their share in rural credit was less than 5%. But it rose to 20% in 1971.

Around one lakh primary agriculture credit societies can be regarded as the bedrock of India’s rural economy. However, the credit societies have never attained the enormous potential opened up by their vast outreach because of poor governance and political interference. While they were originally supposed to be member driven, democratic, self-governing, and self-reliant institutions, Co-operatives have constantly depended on Government for their basic functions. State Governments have become the dominant shareholders, managers, regulators, supervisors and auditors. Savings and credit functions go together and provide strength to the co-operatives all over the world which has been missing in India. Dominance of rich people and rural elite continues in these institutions even today. Still it is the state governments which have given relief including write-off of loans during the crisis. India needs cooperatives and important lessons in this regard can be learned from Kerala.

Social Orientation of Banks

In furtherance of the objectives of Regional and Functional spread of Banking, the social orientation of commercial banking was conceived in the founding statutes of Reserve Bank of India itself which, as a pioneering provision, entrusted to it the responsibility of enlarging the supply of agriculture finance through co-operative institutions or through scheduled commercial banks. On the basis of the recommendations of the Rural banking enquiry committee (1950) for involving commercial banks in rural credit, the then Imperial Bank of India agreed to open 114 offices in rural and semi urban areas (against the recommended 274 branches) but could open only 63 branches in 5 years from July 1951. It was therefore thought that without the state’s intervention, banking facilities could not be extended to such areas. Hence, the Imperial Bank of India was brought under Public ownership as State Bank of India from 1955 with the Central Bank (RBI) holding 92% of its shares with statutory responsibility to establish at least 400 additional branches within a 5-year period. 

It not only fulfilled the target but also went beyond the targets. In September 1959, major state associated banks of Princely states were taken over and vested with the State Bank of India as subsidiaries numbering 7. Still weaknesses of the commercial banking system, such as poor population coverage of bank branches, deposits and credit, urban concentration, vast spectral credit gaps, excess control over banks by industrial and commercial houses, and an unduly poor capital base continued. This led to a re orientation of the banking System. Between 1965 and 1969 social control over commercial banks was brought in by the Government with the following measures:

  1. Introduction of the credit authorization scheme requiring banks to obtain prior authorization for granting fresh credit limits of Rs.10 million or over to any single party to align credit policy more closely with the five-year plan objectives.
  2. The initiation of social control scheme in 1968 with the objectives of achieving a wider spread of bank credit, preventing its misuse and directing a     larger volume of     credit to priority     sectors and
  3. The statutory reconstitution of commercial bank boards with a majority representation to informal sectors

This was done on the basis of the experiment in France, integrating credit allocation with their system of indicative planning which became a success. The decade 1955 to 1965 saw a series of steps towards building a strong institutional structure for promoting medium term and long term loans for industry and agriculture through the public sector. These included the nationalization of the insurance sector in April 1955(LIC), setting up of an Industrial Finance Dept within RBI in 1957, administering a credit guarantee scheme for small scale industries in July 1960 and promotion of many industrial credit institutions. In 1955, Industrial credit and Investment corporation of India was established. In 1958, the Refinance corporation was set up. And in 1964, Industrial Development Bank of India and Unit Trust of India were promoted. RBI also set up the National Industrial Credit (long term operations) fund from the year 1964-65. In the sphere of agriculture credit two funds were set up in 1955 called the National Agricultural Credit (long terms operations) fund and the National Agricultural Credit (Stabilisation) fund.

It is only after nationalization, the State Bank of India started implementing social objectives including branch expansion. IDBI played a crucial role in Industrial Development. Now these public sector institutions are losing public character due to the government policies promoting privatization. The recent development such as, Yes bank with a major investment by SBI remaining as a private bank run by the former DMD of SBI, setting up a National Asset Reconstruction Company as a Private institution headed by a former CGM of SBI and calling IDBI bank as a private bank in spite of the government and LIC having majority shareholding in it, proves the point.

A developing country like India needs public sector banks, cooperatives as well as cooperative banks and more development finance institutions. Let’s learn from our own history and the history of other countries. Let’s reject the silly statement that public sector was born to die because the truth shows otherwise.

Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.

Picture courtesy: Wikimedia Commons

Help us in
* Demystifying finance to common people
* Making financial institutions transparent and accountable
* Spreading financial literacy programmes

Related Stories

guest
2 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Sukumar
Sukumar
1 month ago

I do fully agree with the author. There is an unholy nexus between the political bigheads and business tycoons to demolish all the public sector under undertakings such telephone, banking, education etc and if we keep quite coming generations will suffer irreparable damage. We must fight against it.

P D Amarnath
P D Amarnath
19 days ago

It is other way around. Every one wants to take loan and evade payment. They need PSU BANKS For it. All PSU including banks and insurance must be privatised. They are parasites.