CHAPTER4

NATIONALISATION OF INDIAN BANKS AND THEIR PROGRESS AFTER

NATIONALISATION

CHAPTER4

NATIONALISATION OF INDIAN BANKS AND THEIR

PROGRESS AFTER NATIONALISATION

The banks are the custodians of savings and powerful institutions to provide credit.

They mobilize the resources from all the sections of community by way of deposits and

provide them to industries and others by way of granting loans.

Soon after Independence, the demand for nationalization of banks in India was

raised by some leading members of the Congress party, the socialist and communist

parties. The nationalization of the Reserve Bank in 1949 was the first step in this

movement. Another important event was the passing of the Banking Regulation Act in

1949. This Act gave extensive controlling powers to the Reserve Bank and the

Government over the joint stock banks.

After some time, the question of nationalization of the Imperial Bank of India was

raised. British officers were changed in the management of this bank. Initially, due to its

lack of preparedness, the Government denied the need for nationalization of this bank.

However, in July 1, 1955 on the recommendation of the Rural Credit Survey Committee,

the Imperial Bank of India was renamed as the State Bank of lndia as per SBI Act 1954

and the State Bank Group was established in 1960 as per State Bank of India (Associate

Banks) Act 1959.

It was observed that the growth of Indian commercial banking was too slow and

deficient in many respects. Commercial banks were mainly managed by big business

houses. So concentration of wealth and economic powers was in the hands of a few

industrialists and monopoly business in banking system was created. Bank directors were

related to big business houses. They utilized banks' resources by granting of loans to the

companies in which they had interests. Thus, the resources of banks were misused.

The lending policy of the commercial banks was highly discriminatory. They did

not grant credit for the interest of the nation or for the development of the priority sectors.

Their major advances were distributed among large and medium-scale industries and big

and established business firms. They did not give attention to the requirements of priority

30

sectors like agriculture, small-scale industries, exports etc. Bank finance was also

supplied to some antisocial or undesirable activities like hoarding, black-marketing,

speculation etc.

To overcome these deficiencies radical changes were needed in the structure and

functioning of commercial banks. In this respect, a new banking policy was initiated by

the Congress Government in 1967, described as the 'social control of banks'. The

concept of 'social control' was in fact, introduced by the AICC Resolution on the eve of

the Fourth General Elections. 'Social Control' of banks was deemed to be a midway

between complete social ownership, i.e. nationalization and maintenance of the status

quo. According to the AICC Resolution, social control means greater participation of

banks under the effective guidance of the State in the mobilization of deposits and

allocation of credits to the socially desirable sectors of the economy, which would ensure

enlarged material benefits to the nation at large.

The scheme of social control of banks, was introduced by the Government on

December 14, 1967, when the then Finance Minister Morarji Desai made a statement in

the Lok Sabha while explaining its objectives, main features and the mode of functioning.

In this statement, Mr. Desai categorically stated that there was no need for nationalizing

banks at that time and social control measures alone would effectively serve the purpose.

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".

Government took several steps to exercise social control over banks to make

banking more purposeful, more dynamic and more helpful to the common man. These

steps are discussed as follows:

A) A National Credit Council (N.C.C) at an all-India level was established in

December 1967. It was basically designed as an instrument of credit planning.

The National Credit Council consisted of representatives from large, medium and

small-scale industries, agriculture, cooperative sector, trade and bankers and

professional accountants. The Finance Minister was its Chairman and the

31

Governor of the Reserve Bank was vice-chairman. It started its function from

February 1968. The main functions of the N.C.C were

(i) to assess the demand for bank credit from different sectors of the

economy;

(ii) to determine priorities for granting loans and advances for investment,

considering the availability of resources and the requirements of the

priority sectors, particularly, agriculture, small-scale industry and

exports;

(iii) to co-ordinate lending and investment policies as between commercial

banks and the specialized agencies with a view to ensuring an

optimum and efficient utilization of resources and

(iv) to tackle other related issues as may be referred to it by the chairman

or the vice-chairman of the Council.

B) The Banking Laws (Amendment) Act was passed in December 1968 as legislative

measure for social control over banks and came into effect from 1.2.1969. Main

provisions of this new Act are discussed below:

(i) The majority of directors of a Bank had to consist of persons having

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.

(ii) Bigger banks had to be managed by whole time chairman possessing

special knowledge and practical experience of working in a banking

company or in finance, economics or business administration.

(iii) At least two directors had to possess special knowledge and practical

experience in respect of agriculture, rural economy and co-operation.

(iv) The banks were also prohibited from making any loans or advances,

secured or unsecured to their directors or to any companies in which

they had substantial interest.

(v) The Reserve Bank was, however, empowered to appoint, remove or

terminate the services of the chairman, any director, the chief

32

executive officer or any other officer or employee of a bank, under

specific circumstances.

(vi) All foreign banks were to set up an advisory board consisting of

Indians and conduct their lending policies and activities under the

guidance of such an advisory board.

(vii) The Government had power to take over any bank in the country,

without resorting to legislation, in the interest of depositors and better

provision of credit.

C) In order to enlarge the commercial banks' role in agricultural finance, the

Agricultural Finance Corporation Ltd. was set up in I 968.

D) The RBI also introduced changes in its branch expansion policy, as guided by the

N.C.C for extending banking facilities to wider areas.

However, the social control measures were not able to achieve the desired social and

economic objectives. Therefore, the Government of India nationalized fourteen major

Indian banks each having deposits of Rs. 50 crore and above on 19th July 1969. No

foreign bank was taken over. The names of 14 banks taken over by the Government

under the Banking Companies (Acquisition & Transfer of Undertakings) Act of 1969 are:

Central Bank of India Ltd. (2) Bank of India Ltd. (3) Punjab National Bank Ltd. (4) The

Bank of Baroda Ltd. (5) The United Commercial Bank Ltd. (6) Canara Bank Ltd. (7)

United Bank of India Ltd. (8) Dena Bank Ltd. (9) Syndicate Bank Ltd. (1 0) The Union

Bank oflndia Ltd. (11) Allahabad Bank Ltd. (12) The Indian Bank Ltd. (13) The Bank of

Maharashtra Ltd. and (14) The Indian Overseas Bank Ltd.

On April 15, 1980, Government took over another six private sector banks whose

reserves were more than Rs. 200 crore each. The six banks taken over by the Government

under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 are

(1) The Andhra Bank Ltd. (2) The Punjab and Sind Bank Ltd. (3) The New Bank oflndia

Ltd. (4) The Vijaya Bank Ltd. (5) The Corporation Bank Ltd. and (6) The Oriental Bank

of Commerce Ltd.

In 1993, New Bank of India merged with Punjab National Bank. As a result, the

total number of public sector banks including SBI and its associates are 27.

33

4.1 Reasons for nationalization Various authorities have given many reasons for the nationalization of major

commercial banks. Opinions given by them are discussed below:

A) The then Prime Minister, smt. Indira Gandhi:

According to the opinion of then P.M, Smt. Indira Gandhi, private sector banks were

nationalized (i) to remove control of few; (ii) to provide adequate credit facilities to

agriculture, small industry and exports; (iii) to give professional bent to bank

management; (iv) to encourage new classes of entrepreneurs and (v) to provide

adequate training as well as reasonable terms of service to bank staff

B) Other opinions of protagonists of nationalization:

(i) The Revenue Issue: Nationalization of banks would enable the Government

to obtain all the large profits of the banks as its revenue.

(ii) The Safety Issue: Nationalization of banks would safeguard and promote the

interests of depositors. As a result public would deposit very rapidly a large

amount of money.

(iii) The Monopoly Issue: All major private banks in India were controlled by

one big business house or the other or jointly by a few of them. Consequently,

concentration of wealth and economic power was in the hands of a few

industrialists. The directors of banks had close connections with numerous

companies of big business houses and they used to finance the companies in

which they had interests. Nationalization of banks was desirable to prevent

the spread of the monopoly enterprise. It would secure a great and strategic

control over the national economy.

(iv) The Use Issue: The benefit of commercial banks' massive financial resources

had gone largely to the big business which controlled these. The directors of

banks related to companies of big business houses financed the companies in

which they had interests and sometimes they financed each other's companies

on a reciprocal basis in order to prevent healthy competition. The

manipulation of bank advances helped in increasing some anti-social and

illegal activities such as hoarding, black-marketing etc. and creating artificial

34

scarcity which resulted m continued pnce spirals in our economy.

Nationalization of banks would help in stabilizing the pnce levels by

eliminating artificial scarcity of essential goods and encouragmg m

development of bank resources for productive purposes.

(v) The Credit Issue: Private commercial banks adopted traditional approach in

their credit policy which was not conducive to a rapid, balanced development

of all the sectors of our economy. They gave preference to the organized

sectors like wholesale trade and medium and large industry rather than

smaller traders, industrialists and agriculturists for financing their resources.

Main object of these banks was to earn profits. Most of the bank credit

granted to industry was utilized by them for financing inventory holdings

rather than for its expansion. Therefore bank loans were not purpose-oriented

but were person-oriented or collateral-oriented. Nationalization of banks was

considered as important matter to allocate bank finance for the needs of

Indian economic development

(vi) The Priority Issue: Private Banks did not grant bank credit for the purpose of

national interest and development of priority sector. Bank credit was not

granted to needy farmers or small-scale industrialists or to new entrepreneurs.

Thus, nationalization of banks was desirable so that banking sector could

utilize its resources for the benefit of the priority sector under the schemes of

planned economic development of the country.

(vii)Rural Issue: Private sector banks were not interested in openmg their

branches in semi-urban and rural areas. Their activities were largely confined

to urban areas and mostly in metropolitan cities. After nationalization,

disparity in the spread of banking facilities would be removed and rural

banking would receive a big push through public sector banking.

(viii) The Service Motive Issue: By nationalization commercial banks would

change their function from profit motive to service motive in order to

achieving the goal of socialism.

35

(ix) The Equality Issue: After nationalization, wide disparities in the salaries in

different commercial banks would be removed. Before nationalization top

executives of some private banks received unduly high salaries than their

counterparts in the public sector.

(x) The Tax Issue: The All India Bank Employees Association contended that

nationalized banks would check the incidence of tax evasion and black

money.

4.2 criticisms against nationalization of banks Various criticisms against nationalization of banks were also raised on the following

grounds:

1. It was erroneous to assume that after nationalization the Government would

secure large revenues by way of profits from banks. But according to the

statistical data of the Reserve Bank of India, a small portion of total profit earned

by the nationalized commercial banks went to Government after nationalization.

Nationalization also led to the payment of heavy compensation to the

shareholders of the private sector banks. This gave additional financial burden on

the Government.

2. It was feared that if banks were nationalized the state authorities would take

discriminatory policy in the granting of credit and the whole banking system

would come under political pressures. They would use financial resources for

political purposes rather than for productive purposes.

3. It was said that before nationalization private sector banks were involved in

malpractices and did not safeguard the interests of their depositors. But this

argument was wrong when the banks were performing their functions strictly

under the control of Reserve Bank and Banking Regulation Act. Moreover, the

Banking Regulation Act gave the Reserve Bank of India and the Government

extensive powers to inspect, control and direct the operations and administration

of banks in the interests of depositors as well as of the nation. Further, Deposit

Insurance Corporation was established to protect the interests of the depositors.

In this situation, the argument that nationalized banks would get greater

36

confidence from the public and secure larger deposits from it had no validity.

State monopoly in banks would result in irresponsibility, inefficiency, rigidity,

bureaucracy, corruption and deteriorated services to the customer. So, the

confidence of the public would be lost from the nationalized banks.

4. It was also incorrect to say that private sector banks were responsible to create

monopolies and concentration of economic power in a few hands. In fact, it was

the operation of Government policies of industrial, import and other licensing

and of plan priorities that had encouraged some big concerns to come into

existence and flourish. Banks financed their resources to these concerns only

because they had been playing a vital and commanding role in the economic set­

up, planned and assigned by the Government. If these firms did not get bank

credit, they could not run their business which caused wastage of community's

resources.

5. It was true that credit given by joint-stock banks to agriculturists, co-operative

institutions and small industries constituted a small proportion of the total bank

credit. But this was due to the difficulty of assessing the creditworthiness of the

borrowers and the economic viability of their activities. As the banks were

trustees of the funds deposited by public, they could not give loans to persons

whose creditworthiness was doubtful.

6. Nationalized banks would not be able to change the profit motive into service

motive in their operations. It is not consistent with any banking principles or

practice to lend money for schemes which are not expected to make a profit.

Moreover, planning ,implies an optimum use of resources. Unless nationalized

banks adopt a commercial approach in their operations, it will be impossible to

utilize their resources in the best possible manner. Moreover, the nationalized

banks will be accountable to the nation, though Parliament and even the ministry

of Finance will not approve the performance of the nationalized banks if they do

not follow the banking and accounting principles strictly.

7. It was expected that after nationalization public sector banks would receive better

co-operation from their employees. But the experience of the Reserve Bank of

37

India, the State Bank of India, the Life Insurance Corporation and other

undertakings in the public sector, in this regard disappointed us. There was no

cordial relationship between management and employees. Even, it could not be

said that performance of the State Bank of India was better than that of private

sector banks in regard to the efficiency of the services rendered to the customers.

8. The argument, that public sector banks would set up new branches in semi-urban

and rural areas rapidly than the private banks, had no validity, because, a bank

whether a private bank or a nationalized bank had to run their business by

following banking principles and satisfy itself that the new branches were

economically viable.

9. It was true that the gross emoluments of the top executives of the larger private

sector banks were appreciably higher than those of their counterparts in

undertakings in the public sector. But there was a little difference between their

net emoluments because most of the difference between the gross emoluments of

the two sets of executives was due to higher rates of income taxes which

increased very steeply in the case of higher incomes. Thus, the difference in the

gross emoluments was more apparent than real. However, for this fact, top

executives of the private sector banks were eager to put their best efforts to make

their respective banks more effective and remained alert in rendering newer,

better and quicker service to their customers.

10. Banks were not at all responsible for the tax evasion or for the creation of black

money. It was produced by an irrational tax-structure, high deficit financing and

the corrupt public administration of the country. Therefore, it could not be said

that bank nationalization could check tax evasion or curb the creation of black

money.

4.3 Achievement after nationalization By and large, nationalized banks have achieved some phenomenal success in regard

to attaining the objectives of nationalization. A dramatic change has occurred in the

profile of Indian banking especially in the deployment of commercial bank credit which

38

has made banks as effective catalytic agents of socioeconomic change in the country. The

following are the major achievements of public sector commercial banks:

A. Branch Expansion: There has been a rapid progress in branch expansion of public

sector banks especially in the rural and semi-urban areas, which was one of the

primary objectives of nationalization. Table 1 shows the branch expansion of Indian

scheduled commercial banks during the period of 1969 to 1994.

Table-1: Branch Expansion of Indian Scheduled Commercial Banks

Bank offices at the end of

Bank Group July 1969 June 1989 June 1994

1. SBI & its associate banks 2466 11559 12626

2. Nationalized Banks 4168@ 27574 30405

3. Public Sector Banks (1+2) 6634 39133 43031

4. Private Sector Banks 1688 4429 3987

5. Foreign Banks in India - - 146

6.RRBs - 14136 14530

7. Total (3+4+5+6) 8322 57698 61694

Note:@- Branches of 14 nationalized banks only [Source: RBI Bulletin, Report on Trend & Progress of Banking in India, 1989-90, 1994-95 and 2004-05 respectively]

It is evident from the above table that branch expansion of Indian scheduled

commercial banks increased by 53,372 in number and the overall rate of branch

expansion of was 641 % during this period, in which nationalized banks increased their

braches by 629 %.Branches of SBI and its associate banks increased by 412 % and those

of Indian private sector banks by 136 % during this period. So, we notice that the

performance of nationalized banks was better as compared to other banks. It is noted that

the Indian private sector banks too have tired to maintain the pace of branch expansion by

keeping consistency with the public sector banks. The RBI gave permission to each bank

for opening one branch in metropolitan town after the establishment of four branches in

rural areas. Consequently, a rapid progress of branch expansion of Indian scheduled

commercial banks in rural areas accounts for praise during the post-nationalization

39

period. Table 2 reveals spread of scheduled commercial bank branches in India as per

Bank Group or Population Group wise during the period of 1969-1994.

Table-2: Distribution of Scheduled Commercial Bank Branches in India- Bank G /P I . G roup opu ation roup wise

Centre SBI NTN PSBs PrSBs Fgn RRBs ASCBs (1) (2) (3=1+2) (4) (5) (6) (7=3+4+5+6)

Rural: July 1969 820 703 1523 337 - - 1860

(33 .3) (16.9) (23.0) (20.0) (22.4) June 1989 5331 13177 18508 1423 - 13083 33014

(46.1) (47.8) (47.3) (32.1) (92.6) (57.2) June 1994 5989 14709 20698 1271 - 13415 35384

(47.4) (48.4) ( 48.1) (31.8) (92.3) (57.3)

Semi-Urban: July 1969 1172 1465 2637 708 - 3345

(47.5) (35.1) (39.7) (41.9) (40.2) June 1989 3336 5510 8846 1411 - 908 11165

(28.9) (20.0) (22.6) (31.9) (6.4) (19.4) June 1994 3437 5971 9408 1330 2 960 11700

(27.2) (19.6) (21.9) (33 .4) (1.4) (6.6) (18.9)

Urban: July 1969 249 928 1177 279 - - 1456

( 10.1) (22.3) (17.7) (16.5) (17.5) June 1989 1701 4826 6527 856 - 141 7524

(14.7) (17.5) (16.7) (19.3) (1.0) (13.0) June 1994 1919 5388 7307 816 11 151 8285

(I 5.2) (I 7.7) (17.0) (20.5) (7.5) (1.1) (13.5) Metrogolitan: July 1969 225 1072 1297 364 - - 1661

(9.1) (25.7) (I 9.6) (21.6) (20.0) June 1989 1191 4061 5252 739 - 4 5995

(1 0.3) (14.7) (13.4) (I 6.7) (Negligible) ( 10.4) June 1994 1281 4337 5618 570 133 4 6325

(I 0.2) (14.3) (13.0) (I 4.3) (91.1) (Negligible) (10.3)

Total: July 1969 2466 4168 6634 1688 - - 8322

(100) (100) (100) (100) (100) June 1989 11559 27574 39133 4429 - 14136 57698

(100) (100) (100) (100) (100) (100) June 1994 12626 30405 43031 3987 146 14530 61694

(100) (1 00) (100) (100) (100) (100) (100)

Figures in brackets indicate percentage to total in each group

40

[Source: RBI Bulletin, Report on Trend & Progress of Banking in India, 1989-90, 1994-95, 2004-05] SBI = SBI & its Associate Banks

NTN =Nationalized Banks

PSBs = Public Sector Banks

PrSBs = Private Sector Banks

Fgn =Foreign Banks in India

RRBs = Regional Rural Banks

AS CBs = All Scheduled Commercial Banks

All scheduled commercial banks opened 57.3 % branches in rural areas during

1969-1994 while in other areas rate of opening new branches by them decreased during

this period. SBI & its associate banks opened total branches 47.4% in rural areas in June

1994, as compared to 33.3 % in 1969. Nationalized banks approximately tripled their

branches in rural areas from 16.9% to 48.4% during 1969-1994. The proportion of rural

branches in the total number of public sector banks branches recorded a significant rise

from 23 % to 48.1 %. Similarly, the proportion of rural branches of private sector banks

increased from 20 % to nearly 32 % during 1969-1994.

B. Deposit Mobilization and Credit Expansion: There has been a spectacular rise in

the rate of deposit mobilization and in the bank credit during the post-nationalization

period. Table 3 depicts the growth of bank deposits and credits of Indian scheduled

commercial banks during the post-nationalization era ( 1969-1994 ).

Table-3: Deposits and Credits of all Indian Scheduled Commercial Banks (Figures in crore of rupees)

Year Bank Deposits Bank Credits June 1969 4640 3599

March 1989 140150 84719

March 1994 315132 164418

[Source: RBI Bulletin, Report on Trend & Progress of Banking in India, 1970-71, 1989-

90 and 1994-95 respectively]

It is shown from the above table that aggregate deposits increased from Rs.4640

crore in 1969 to Rs. 140150 crore in 1989 and thereafter also increased in 1994 by Rs.

174982 crore. Planned economic development, deficit financing and increase in currency

41

issued helped to increase the quantum of bank deposits during the post-nationalization

period. Scheduled Commercial Banks in India promoted banking habit among the people

through sustained publicity, extensive branch banking and relatively prompt service to

the customers.

Massive deposit mobilization as well as inflationary expansion of money supply

caused phenomenal growth in bank credit. Total bank credit of all Indian scheduled

commercial banks recorded a jump from Rs. 3599 crore toRs. 84719 crore during the

period June 1969 to March 1989 and thereafter, it became approximately doubled from

Rs. 84 719 crore in March 1989 to Rs. 164418 crore in March 1994.

C. Advances to Priority sectors: Since, one of the important objectives of bank

nationalization was to channelise the flow of credit to the priority sectors, public

sector banks made marked progress in this direction i.e., after nationalization, there

was a remarkable change in the credit policy of the banks. Credit to the priority

sectors especially agriculture, small-scale industry and small transport operators were

given more importance by the policy makers. In addition, other priority sectors such

as retail trade, professional and self-employed persons, education, housing loans for

weaker sections and consumption loans were also included

In 1980, RB I issued certain directives to the banks regarding priority sector

lending and expected their cooperation and compliance:

(a) Priority sector advances should constitute 40% of aggregate bank credit;

(b) Out of priority sector advances, at least 40 % should be provided to

agriculture;

(c) Direct advances to the weaker sections in agriculture and allied activities

in rural areas should form at least 50 % of the total direct lending to

agriculture;

(d) Bank credit to rural artisans, village craftsmen and cottage industries

should be at least 12.5% of the total advances to small scale industries;

(e) About 12% of bank credit should go to exporters.

Advances provided by public sector banks to the priority sectors have been shown

in Table 4.

42

Table-4: Advances to the Priority Sectors by Public Sector Banks (as on the last reporting Friday)

Number of Accounts Amount Outstanding Sector (in lakh) (Rs. crore)

June June March June June March 1969 1989 1994 1969 1989 1994

I. Agriculture 1.7 197.48 217.9 162 14369 21204 (5.4) (18.4) (15.0)

(i) Direct 1.6 190.26 212.9 40 12920 19255 (1.3) (16.5) (13.7)

(ii) Indirect 0.1 7.22 5.0 122 1449 1949 (4.1) (1.9) (1.4)

II. Small-scale industries 0.5 27.07 30.2 257 13248 21561 (8.5) (16.9) (15.3)

III. Other priority sector 0.4 106.46 116.9 22 7257 10432 advances (including small (0.7) (9.3) (7.4) transport operators, self-employed persons, rural artisans etc.)

IV. Total priority sector 2.6 331.01 365.0 441 34874 53197 advances (I+II+III) (14.6) (44.6) (37.8)

v. Net Bank Credit Nil Nil Nil 3016 78178 140916

Data are provisional. Figures in brackets represent percentages to net bank credit [Source: RBI Bulletin, Report on Trend & Progress of banking in India, 1989-90, 1994-95 and 2004-05 respectively]

It is evident from this table that the share of the priority sectors in net bank credit of

the public sector banks increased from nearly 15 % in June 1969 to 37.8 % in March

1994. Between June 1969 and March 1994, the number of borrowal accounts with the

public sector banks under priority sectors rose from 2.60 lakh to 365.0 lakh which was

43

about 140 times. Advances by public sector banks to the priority sectors increased by

about 12000% from Rs. 441 crore in June 1969 toRs. 53197 crore in March 1994. At the

initial stage of post-nationalization period, the rate of progress was quite rapid but later

the progress was more modest. "The relatively slow progress of advances to the priority

sectors was due to the fact that the bank officials from top to bottom were not imbued

with the new objectives of banking. At the same time, banks were also worried at the

poor and unsatisfactory recovery performance of the agriculture and small sectors" [Dutt

& Sundaram, 2004 p.835].

D. Social Banking: Special Employment and Poverty alleviation programmes: As

social banking, the public sector banks have played a significant role in financing

their funds in various social sector schemes sponsored by the Government of India

for employment generation and poverty alleviation. These schemes are discussed

below:

(a) Differential Rate of Interest (DRI): The social objective of protecting the

poor from the rich can be accomplished if the banks follow a policy of

interest rate discrimination called 'Differential Rate of Interest (DRI)'

Scheme. The Scheme of DRI is justified on economic ground in so far as the

elasticity of demand for credit is higher in the case of poor than in the case

of rich (Dasgupta, 1972, p.1281 ). It has also been argued that the DRI

Scheme is justified on the ground that the public financial institutions are to

protect the weaker sections from monopolistic exploitation by the private

money lenders (Rao, 1972, p.l893). On the basis of these justifications, the

Government of India gave permission on March 25, 1972 to public sector

banks for implementation of DRI Schemes on advances. This scheme was

introduced in April 1972, covering 162 districts. Later the scheme was

extended to the whole country. Under this scheme loans are given at 4 %

rate of interest to such borrowers who (a) have really no tangible security of

any worth to offer on their own (b) cannot produce a guarantee of a well-to­

do party and (c) can be helped to rise through the scheme which becomes

economically viable within 3 years.

44

Under this scheme, loans up to Rs. 6,500 are given to a rural household and

urban household having annual income up to Rs. 6,400 and Rs. 7,200

respectively. Public sector banks issued advances under DRI Scheme Rs.

679.59 crore in 47.67 lakh borrowal accounts at the end of March 1989 as

compared to Rs.88 lakh in 36000 borrowal accounts in 1972. At the end of

March 1989, the advances of these banks under this scheme formed 0.9% of

total advances, while total advances under this scheme to scheduled castes

and scheduled tribes at the end of March 1988 formed 49.3 % of total DRI

advances as against the target of 40 %. The number of accounts and amount

outstanding declined later due to the carefulness of banks to select the really

deserving ones.

(b) Self-Employment Scheme for Educated Unemployed Youth (SEEUY):

This scheme has been effective since 1983-84. The public sector banks

sanctioned an aggregate credit ofRs. 207.93 crore to 1.01lakh beneficiaries

during 1987-88 and Rs. 394.78 crore to 1.88 lakh beneficiaries during 1988-

89.

(c) Self-Employment Programme for Urban Poor (SEPUP): The

Government of India introduced this scheme in September 1986 to provide

self-employment opportunities to the urban poor. The public sector banks

sanctioned an aggregate credit of Rs. 136.55 crore and Rs 130.69 crore to

3.82 lakh and 3.41 lakh beneficiaries during 1987-88 and 1988-89

respectively.

(d) Integrated Rural Development Programme (IRDP): The Government of

India introduced this scheme to rectify imbalances in rural economy and

also for all-round progress and prosperity of the rural masses. Under this

scheme, banks assisted nearly 3 million beneficiaries and disbursed a total

amount of Rs. 1,190 crore as loan and Rs. 800 crore as subsidy during 1990-

91. Out of 3 million beneficiaries, over 1.5 million belonged to SCs I STs

and 0.9 million were women.

45

The above discussion clearly shows the achievements of public sector banks after

nationalization. However, there are certain limitations associated with the working of the

public sector banks. They are:

(i) The quality of service rendered by them has deteriorated due to

staff indiscipline and absence of the system of accountability.

(ii) Due to lack of adequate professionally trained staff in certain areas

like agricultural financing, public sector banks except State Bank

of India did not carry their operations in good condition.

(iii) Interference of the high officials of the department of the

Government of India in the management of banks leads to

decision- making on the basis of political expediency rather than

by following strict banking norms.

(iv) The increasing advances to unemployed for self-employment and

loans to weaker sections have created the problem of bad debts,

doubtful debts and over-dues.

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