Social control and Nationalization of Banks

At the time of independence, the private sector banks were predominantly urban–oriented and
under the control of a few industrialists which had not helped in achieving the basic socio–
economic objectives. The credit needs of agriculture, small– scale industries and also weaker
sections such as small traders and artisans continued to be ignored. Even though for nearly
three fourths of population, agriculture is the main occupation and contributed 50 per cent of
gross domestic product, the total bank credit advanced to this sector was only one per cent as
on June, 1967. The bulk of the deposits contributed by the public were being advanced to the
industrial and trade sectors ignoring the prime sector of agriculture. In agriculture, the credit
scene was dominated by the private money lenders who were charging exorbitant rates of
interest.

All these situations compelled the imposition of social control over the banks in 1968. The
main aim of social control was achieving of wider spread of bank credit to the priority sectors
thereby reducing the authority of managing directors in advancing the loans. Social control
created the tempo of banks expansion, as evident by the addition of 785 new branches by the
end of first half of 1969. But this did not make dent in increased channelization of credit to
agricultural sector and to weaker sections .The directions issued by the Government were
also ignored by any of the banks. Under these circumstances the Government thought that the
social control of banks was not sufficient for socio – economic development and
nationalisation of banks was considered as an alternative solution. The Government of India
on 19th July 1969, promulgated an ordinance called “The Banking companies Ordinance
1969” (Acquisition and Transfer of Undertakings). Under this act 14 commercial banks
having deposits of more than Rs. 50 crore each were nationalized and they were

1. Central Bank of India

2. Bank of India

3. Punjab National Bank

4. Bank of Baroda

5. United commercial Bank

6. Canara Bank

7. United Bank of India

8. Dena Bank

9. Union Bank of India

10. Allahabad Bank

11. Syndicate Bank

12. Indian Bank

13. Bank of Maharashtra

14. Indian overseas Bank

The objectives of nationalisation of banks (done by the former Prime Minister, Smt. Indira
Gandhi) were:

• Removal of control on banking business by a few industrialists.

• Elimination of the use of bank credit for speculative and unproductive purposes.

• Expansion of credit to priority areas which were grossly neglected like agriculture and
small scale industries.

• Giving a professional bent to the bank management

• Encouragement of new entrepreneurs

• Provision of adequate training to bank staff.

The average population served per bank branch declined markedly from 65,000 in June, 1969
to 32,000 by June, 1975.

Encouraged by the success of first spell of nationalisation of banks, six more

banks in the private sector, having deposits more than Rs.200 crore were nationalised on 15th
April 1980.

The six banks nationalised in the second spell were

1. Punjab and Sind bank

2. Andhra Bank

3. New Bank of India

4. Vijaya Bank

5. Oriental Bank of Commerce

6. Corporation Bank.

LEAD BANK SCHEME

The study group appointed by National Credit Council (NCC) in 1969 under the
chairmanship of Prof. D.R.Gadgil recommended “Service Area Approach” for the
development of financial structure.

In the same year i.e., 1969, RBI appointed Sri. F.K.F Nariman committee to examine
recommendations of Prof. Gadgil’s study group. The Nariman committee also endorsed the
views of the Gadgil committee on “Service Area Approach” and recommended the
formulation of “Lead Bank Scheme”. The RBI accepted the Nariman’s committee
recommendations and lead bank scheme came into force from 1969.

Under the lead bank scheme, specific districts are allotted to each bank, which would take the
lead role in identifying the potential areas for banking and expanding credit facilities. Lead
bank is the leading bank among the commercial banks in a district i.e. having maximum
number of bank branches in the district. Lead bank acts as a consortium leader for
coordinating the efforts of all credit institutions in the each allotted district for the
development of banking and expansion of credit facilities.

The activities of lead bank can be dealt under two important phases

Phase I: Survey of the lead district

The RBI has mentioned the following functions of lead bank under phase-I

• Surveying the potential areas for banking in the district.

• Identifying the business establishments which are so far dependent on non –

institutional agencies for credit and financing them so as to raise their income
• Examining the available marketing facilities for agricultural and industrial products
and linking credit with marketing.

• Invoking cooperation among different banks in opening new bank branches.

• Estimating the credit gaps in various sectors of district economy.

• Developing contacts and maintaining liaison with the Government and other agencies.

Phase II-Preparation of credit Plans:

RBI emphasized that the lead bank should

• Formulate the bankable loaning schemes involving intensive use of labour, so as to

generate additional employment.

• Disburse loans to increase the productivity of land in Agriculture and allied activities,
so as to increase the income level.

• Give maximum credit to weaker sections of the society mainly for productive
purposes.

Therefore lead bank scheme expects the banker to become an important

participant in the developmental process in the area of its operation in rural areas, and the
service area approach put the banker in the position of implementing the development plans.

Contd…

Table2: Lead Banks of Different Districts in Andhra Pradesh

S.No District Lead Bank

1 East Godavari Andhra Bank

2 West Godavari Andhra Bank 3 Guntur Andhra Bank 4 Srikakulam Andhra Bank

5 Chittoor Indian Bank

6 Krishna Indian Bank

7 Anantapur Syndicate Bank

8 Cuddapah Syndicate Bank

9 Kurnool Syndicate Bank

10 NelloreSyndicate Bank

11 Prakasam Syndicate Bank

12 Mahbubnagar State Bank of India

13 Medak State Bank of India

14 Visakhapatnam State Bank of India

15 Vizianagaram State Bank of India 16 Warangal State Bank of India

REGIONAL RURAL BANKS (RRBS)

All India Rural Credit Review Committee (AIRCRC) under chairmanship of Sri. B.
Venkatappaiah during the year 1969 was of the opinion that over large parts of the country
the marginal and small farmers were deprived of having access to the cooperative credit both
for production and investment purposes. This stressed the establishment of institutional
financial

agencies under public sector. Consequently the first spell of nationalization of banks was
done with greater expectations, but the situation had not changed as per the expectations.

Hence, the Government of India appointed a working committee under the chairmanship of
Sri.

M. Narasimham to study the financial assistance rendered to the weaker sections in the rural
areas. This working committee recommended the setting up of rural based institutional
agencies called “Regional Rural Banks” after identifying shortcomings in the functioning of
commercial banks and cooperatives.

The Government of India accepted the recommendations of Sri.Narsimham committee and

regional rural banks came in to existence through regional rural banks ordinance on 26th
September, 1975. Initially only 5 RRBs were set up on pilot basis with sponsorship of
commercial banks on October 2nd, 1975. This ordinance of 1975 was replaced by the
Regional Rural Banks Act, 1976.

S.No Sponsoring Bank Name of RRB Head quarters

1. Syndicate Bank Pratham Bank Moradabad ( UP)

2. State Bank of India (SBI) Gorakhpur Gorakhpur (UP)

3. United Bank of India Gaur Grameena Bank Malda (WB)

4. Punjab National Bank Haryana Kshetriya Grameena Bank Bhiwani ( Haryana)

5. United Commercial Bank Jaipur Nagalur Anchalik Grameena Bank Jaipur, Rajasthan
The objectives of RRBs are:

• To develop rural economy.

• To provide credit for agriculture and allied activities.

• To encourage small scale industries, artisans in the villages.

• To reduce the dependence of weaker sections (Marginal farmers, small farmers and
rural artisans) on private money lenders.

• To fill the gap created by the moratorium on borrowings from private money lenders.

• To make backward and tribal areas economically better by opening new bank
branches.

• To help the financially poor people in their consumption needs.

Functioning of RRBs:

Each RRB is being sponsored by a scheduled commercial bank. The operational area of each
RRB is one or two districts. Each branch of RRB can serve a population of roughly 20,000
people. Authorized share capital of each RRB is Rs. one crore, contributed by central
government, state government and sponsoring commercial bank in the ratio of 50:15:35.

Issued capital for each RRB is Rs. 25 lakhs. The rate of interest charged by RRBs on the
loans is same as that of Primary Agriculture Credit Societies (PACS), but they are allowed to
offer 0.5 per cent interest more than that of commercial banks on its deposits. RRBs have
simplified procedural formalities in giving agricultural finance on recommendations of Sri.
Baldev Singh’s working group. RRBs use local languages in their transactions. The cost of
operation i.e. user charges are low as compared to that of commercial banks.

SCALE OF FINANCE

Definition: It is an indicative cost taken as base cost depending on which the amount to be
financed to a farmer is fixed. Normally scale of finance is given in a range, as the cost of
cultivation for a farmer practicing traditional methods of farming and that of a progressive
farmer practicing modern methods of cultivation differs. The lower value of the range

corresponds to the requirement of the former while the upper value corresponds to the latter.
Scale of finance is fixed for annual, perennial crops and livestock also. Livestock will have
fixed costs of finance and they are termed as unit costs. The unit varies with the type of
livestock. Ex: for milch cattle the unit refers to two animals, for sheep and goat a minimum of
10 animals and for poultry a minimum of 500 birds.

Factors influencing the scale of finance:

1. Type of the crop: It varies from crop to crop.

2. Nature of the crop: With in the same crop between the improved varieties and high
yielding varieties (HYVs) the scale of finance differs.

3. Season: Scale of finance differs with season for the same crop.

4. Type of land: Based on the type of the land i.e. irrigated or dry the scale of finance
differs with the same crop.

5. District/Area: For the same crop the scale of finance varies from district to district.

How Scale of Finance is fixed:

Scale of finance is fixed for each district by a committee known as District Level Technical
Committee (DLTC).The members of DLTC constitute representatives of lead bank of that
district, NABARD, local co-operative banks and commercial banks, officials of department
of agriculture& animal husbandry etc. The meetings of DLTC are chaired by district
magistrate/ district collector and convened by respective lead bank district manager. DLTC
compiles technical survey report with the information obtained from NABARD. NABARD in
turn obtains information from the state agricultural department every year, which will have
the necessary details like what are crops grown, their extent etc. By using the above details a
potential map is prepared. By using this one can list out the priority activities to be financed
in each part of the district and extent to which these are to be financed. Finally cost of
cultivation is estimated based on the market trends & needs. The finance scale is not fixed
and keeps on changing every year.

Kisan Credit Card (KCC)

The GOI introduced KCC scheme by banks during 1998 -99. The scheme was designed by
NABARD. KCC aims at adequate and timely support from the banking system to the farmers
for their short-term production credit needs in cultivation of crops, purchase of inputs etc in a
flexible and cost effective manner. Under this scheme, the farmers would be issued a credit
card- cum pass book incorporating the name, address, particulars of land holding, borrowing
limit, validity period etc and it will serve both as an identity card & facilitating financial
transactions. Credit limit may be fixed on the basis of operational holding, cropping pattern
and scale of finance as recommended by the District Level Technical committee (DLTC) /
State Level Technical committee (SLTC) As per the recommendations of Sri R.V. Gupta
committee in the year 1998, on the flow of credit to agricultural sector, apart from the total
credit need, a 20 per cent of total peak level credit requirement (PLCR) will be given
contingent credit need (with a

maximum ceiling of Rs.10,000) The KCC will be valid up to 3 years and subject to annual
review. The KCC will be considered as a non-performing asset (NPA) if it remains
inoperative for a period of two successive crop seasons.

COST OF CREDIT

The cost of credit is the additional amount, over and above the amount borrowed, that the
borrower has to pay. It includes interest, arrangement fees and any other charges. Some costs
are mandatory, required by the lender as an integral part of the credit agreement.

MICRO FINANCE or Micro Credit

Microcredit is used to describe small loans granted to low income individuals that are
excluded from the traditional banking system. It is part of the larger microfinance industry,
which provides not only credit, but also savings, insurance, and other basic financial services
to the poor. The term ‘micro’ stems from the relatively small amounts of money that are
being borrowed or saved.