There were certain notable features in the sectoral allocation of Commercial Bank’s credit among the different segment of Indian Economy in the pre-nationalization era of Indian Banking Industry. The highlight of this period may be summed up as below
- The sharp increase in the share of the industrial sector and a decrease in that of trade and other sectors –
The share of industrial credit in commercial banks increased from 34% in 1951 to 67.5% in 1968 thereby nearly doubled within a span of 17 years. On the other hand, it declined from 36% to 19% within the same period. The otherwise sector also declined from 28% to 11%. Moreover out of industrial credit, the bulk (about 80%) of bank credit went to the corporate sector and very small fraction too small scale and agriculture industries encouraged the demand of the credit in this segment. On the other hand, large industrial and established business houses, because of their ownership and control over big commercial banks, could easily divert the increasing share of banks credit to their profits.
- Inequitable distribution of credit – The prevailing distribution pattern showed that 70% of total industrial credit went to only 10% of total number of borrowable accounts, each with a credit outstanding over ₹ 5.00 lacs, whereas 12% of account holders with credit outstanding of less than ₹ 10,000 each received barely 4% of total credit. A similar distribution pattern was observed in guarantees also. This was mainly due to the fact that securely oriented credit policies in reach of the safety of the credit favored the large borrowable accounts. This was more prominent if the banks are largely controlled and owned by big industrial groups. This was due to the low capital base of a commercial base which facilitated the central of credit liquidity in few hands, who had command over the flow of funds resulting from rapidly growing deposits.Therefore all the proposals to raise the capital base of the commercial banks by new issues of the share capital was met with stiff opposition from chambers of commerce and Indian Banks Association.
Apart from this, another institutional mechanism of interlocking directorship was used to exercise control over the Banks Credit policy. According to a survey conducted in 1963, about 188 persons, serving on the boards of 20 banks, had 1452 directorships of other companies also and the total numbers of these directors were 1100.
It was further revealed that through these common directors, banks were connected with insurance and finance companies, investment trust, manufacturing and trading companies basics other non-profit organizations.
Cornering the industrial licenses by the large industrial borrowers was yet another device to appropriate the bulk of credit portion in their favor. On the basis of these licenses, they obtained long term financial assistance and underwriting facilities from development banks and other term lending institutions. Such arrangements are usually treated as good indicators for soundness of projects due to which commercial banks were more willing to provide working capital. Besides these rediscounting and refinance facility offered to banks by IDBI for industrial loans of various kinds at concessional rate of interest further encouraged commercial banks to advance industrial credit liberally.
All the above factors led the government to realign its policy of credit flow. The govt felt the strong need to reform the credit flow. The govt. felt the strong need to reform the credit distribution policy and to make major operational reforms in the Indian banking system with the objectives to reverse the negative effects caused by the above-mentioned phenomenon.
14 Commercial Banks were nationalized on 19th July 1969. As a result at this decision all the assets of a commercial bank as listed by the Govt., are transferred from private ownership to public ownership. The nationalization of banks was aimed to Govt. of India more control of credit delivery. The main objective of banking under the new perspective was more focused on the social welfare of the majority of social society rather than pure profit making. It was mainly done in order to facilitate the smooth flow of funds for agriculture, small scale, and village industries, as their development was crucial to the overall development of Indian Economy.
The second phase of nationalization of the commercial bank came on April 15, 1980, when govt. realized that apart from 14 Commercial Bank which was earlier nationalized in 1969, these all still some major commercial banks whose resources are not properly utilized and distributed among the different sectors of industry and society. As a result, the Govt. decided to nationalize 6 more Commercial Banks. These 6 commercial banks which were nationalized in 1980 were.
- Oriental Bank of Commerce
- Andhra Bank
- New Bank of India
- Punjab & Sindh Bank
- Corporation Bank
- Vijaya Bank