Social Control of Commercial Banks:
Social control refers to a set of regulatory measures introduced by the Government of India to align the functioning of commercial banks with national priorities, especially in a developing economy. The concept was introduced in 1967 as a means to address the shortcomings of the commercial banking system which, until then, had been dominated by private ownership and was primarily focused on financing large-scale industries and urban-centric businesses. The system often neglected vital sectors such as agriculture, small-scale industries, exports, and rural development, which were crucial for inclusive growth.
Objectives of Social Control:
- To curb the concentration of economic power in the hands of a few industrial houses.
- To redirect credit to underprivileged and priority sectors such as agriculture, small businesses, and cooperatives.
- To ensure a more equitable and rational allocation of financial resources across the economy.
- To professionalize banking operations by inducting qualified and experienced personnel into the decision-making bodies of banks.
- To increase transparency and accountability in the banking system by subjecting them to public scrutiny and regulatory oversight.
Measures Taken Under Social Control:
- Establishment of the National Credit Council (NCC) to guide the flow of institutional credit in accordance with national priorities.
- Inclusion of professionals such as economists, financial analysts, and management experts in bank boards to reduce dominance of industrialists.
- Requirement for banks to prepare and submit annual credit plans to the Reserve Bank of India (RBI).
- Issuance of guidelines by the RBI to limit credit exposure to large industrial groups.
- Increased scrutiny of lending patterns and periodic audits to monitor compliance.
Limitations of Social Control:
- Private ownership and vested interests continued to influence credit allocation.
- Resistance from bank managements diluted the implementation of reforms.
- Lack of enforcement mechanisms led to continued malpractices.
- Political interference influenced credit decisions.
- Weak institutional capacity and follow-through limited effectiveness.
Because of these shortcomings, the government undertook the more decisive step of nationalizing key banks.
Nationalization of Commercial Banks:
Nationalization refers to the process by which the government takes control of privately owned institutions and converts them into state-owned enterprises. In India, nationalization of commercial banks was a historic move initiated by Prime Minister Indira Gandhi on July 19, 1969. This brought 14 large banks under public ownership.
Objectives of Nationalization:
- To expand banking infrastructure in rural and semi-urban areas.
- To channel institutional credit to agriculture, small industries, and self-employment.
- To reduce regional disparities by ensuring banking in backward areas.
- To mobilize savings and redirect them into productive investments.
- To end domination of elite industrialists over bank funds.
- To democratize credit access for marginalized sections.
List of Banks Nationalized in 1969:
- Allahabad Bank
- Bank of Baroda
- Bank of India
- Bank of Maharashtra
- Central Bank of India
- Canara Bank
- Dena Bank
- Indian Bank
- Indian Overseas Bank
- Punjab National Bank
- Syndicate Bank
- UCO Bank
- Union Bank of India
- United Bank of India
Further Nationalization in 1980:
Six more banks were nationalized on April 15, 1980:
- Andhra Bank
- Corporation Bank
- New Bank of India
- Oriental Bank of Commerce
- Punjab & Sind Bank
- Vijaya Bank
This brought around 90% of the banking industry into the public sector.
Impact of Nationalization:
- Massive rural branch expansion (from 1,443 in 1969 to 35,000+ by the 1980s).
- Increased credit to agriculture and small-scale industries.
- Improved financial inclusion and access to banking for the poor.
- Better savings mobilization and capital formation.
- Development of a diversified and stable banking system.
- Support for poverty alleviation and employment schemes.
Challenges Post-Nationalization:
- Inefficiency, overstaffing, and bureaucratization of banks.
- Political interference in loan approvals caused NPAs to rise.
- Lack of innovation due to absence of competition and incentives.
Conclusion:
Social control was a moderately effective attempt to regulate the banking sector, but it could not achieve the desired results. Nationalization emerged as a transformative solution, aligning banking with socio-economic goals and promoting inclusive growth. Despite facing operational challenges, the nationalized banks significantly contributed to financial deepening and equitable development in India.