Money-lending, a traditional form of banking existed in India from ancient times. Money-lenders were rich people and they charged very high rate of interest from the borrowers. The rates of interest varied from borrower to borrower. The borrowers, mostly the poor persons remained under debt throughout their life. The unfair means adopted by the money-lenders made the debt so heavy that the borrowers had to mortgaged whatever little they had to pay the interest and capital. These money-lenders as a class were never interested in the welfare of the people. On the other hand their only motive was to amass wealth at the cost of the needy who approached them for small help.
It was a little over a century ago that the modern banking started in India. Under the British regime, the agency houses were the earliest banking institutions which combined this work with their trading activities. The first bank of limited liability managed by Indians was the Oudh Commercial Bank founded in 1881. Then came the Punjab National Bank (1894) and many other later in the wake of the Swadeshi Movement in early twentieth century.
These banks were controlled by big capitalists and industrialists and by and large catered to the needs of a small section of society belonging to the upper strata. These banks had the area of their operations in the big cities and their clients were big businessmen and industrialists. The poor and the needy in rural areas still depended on money-lenders who continued to be the only source of loans. As already said these money-lenders exploited the poor and ignorant masses and charged exhorbitant rates of interest. Thus the banks rendered financial assistance to only urban rich people engaged in commerce, trade and industry. As a matter of fact these financial institutions were managed and run by moneyed people for the benefit of rich people in the urban areas only. The poor, both in the rural and urban areas were unable to take any advantage of these institutions. In short, the bank finances were made available to rich people to enable them to earn more-and-more profits.
With a view to bringing commercial banks into the mainstream of economic development with definite social commitment and objectives, the Government of India acquired the ownership and control of 14 major banks in the country in July 1969. Six more banks were nationalized in April 1980. Some of the objectives of the nationalization were: (i) mobilize savings of the people to the largest possible extent and to utilize them for productive purposes; (ii) prompt operations of banking system by a large social purpose and subject to close public regulation; (iii) legitimate credit needs of private sector industry and trade, big or small; (iv) ensure that needs of the productive sectors of the economy and in particular those of farmers, small-scale industrialists and self employed professional groups are met in an increasing manner; (v) ask nationalized banks to foster opportunities for hitherto neglected and backward areas in different parts of the country, and (vi) curb the use of bank credit for speculative and other unproductive purposes.
It is clear from what has been said above, that the objective of the nationalization of the banks was to promote economic development and social justice. In addition to the rapid growth of banking system and branch expansion, Regional Rural Banks were started in 1975 to increase their local involvement for meeting credit requirements of weaker sections, small and marginal landless, artisans and small entrepreneurs. For facilitating co-ordinate effort on the part of all banks to increase their involvement in well planned effort to promote credit based development of districts economy and to ensure adequate support to beneficiary oriented development programme. Lead Bank Scheme was introduced towards the close of 1969. NABARD came in July 1982 as an apex institution accredited with all matters concerning policy, planning and operation in the field of credit it for agricultural and other economic activities in the rural area.
The overall objective of all these banks and schemes is to provide loans to the poorer sections of population on easy terms and low rate of interest. To that extent it is very welcome, but facts reveal a picture not very satisfactory.
Banks are supposed to provide credit to poor for various purposes. But in actual functioning poor people fail to get bank credit. Those who are able to pull strings succeed in getting loans-after-loans. Other do not. Many of the loanees fail to repay and the loans are written off. This results in substantial loss to the banks. It also encourages clever people to eat away the public money. Then, there are middlemen operating in connivance with the bank staff. They take their share (a sizable amount) and thus the full amount of the loan does not reach the hand of the loanee. Non-payment of installments by the borrowers effect the viability of the banks. All this is either due to the administrative favoritism and nepotism or the interference by the politicians.
Bank services have suffered rapid deterioration after nationalization. Callous and indifferent attitude of the inefficient bank staff has hampered the healthy development of banking service. An efficient and helpful staff can make a significant contribution towards the real and genuine service to the needy people. There is no denying the fact that banks have done good work in socio-economic transformation, but they must function more efficiently and with a spirit of service to fulfill the objectives of nationalization.