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Q-NATIONALIZATION OF BANK AS A PART OF SOCIAL CONTROL

Social Welfare
It was the need of the hour to direct the funds for the needy and required sectors of the indian
economy. Sector such as agriculture, small and village industries were in need of funds for their
expansion and further economic development.
Controlling Private Monopolies
Prior to nationalisation many banks were controlled by private business houses and corporate
families. It was necessary to check these monopolies in order to ensure a smooth supply of credit to
socially desirable sections.
Expansion of Banking
In a large country like India the numbers of banks existing those days were certainly inadequate. It
was necessary to spread banking across the country. It could be done through expanding banking
network (by opening new bank branches) in the un-banked areas.
Reducing Regional Imbalance
In a country like India where we have a urban-rural divide; it was necessary for banks to go in the
rural areas where the banking facilities were not available. In order to reduce this regional
imbalance nationalisation was justified:
Priority Sector Lending
In India, the agriculture sector and its allied activities were the largest contributor to the national
income. Thus these were labelled as the priority sectors. But unfortunately they were deprived of
their due share in the credit. Nationalisation was urgently needed for catering funds to them.
Developing Banking Habits
In India more than 70% population used to stay in rural areas. It was necessary to develop the
banking habit among such a large population.
Preventing concentration of economic power
Initially, a few leading industrial and "business houses had close association with commercial
banks. The directors of these banks happened to be the same industrialists who established
monopoly control on the bank finance.
They exploited the bank resources in such a way that the new business units cannot enter in any
line of business in competition with these business houses. Nationalisation of banks, thus, prevents
the spread of the monopoly enterprise.

Social control was not adequate

The 'social control' measures of the government did not work well. Some banks did not follow the
regulations given under social control. Thus, the nationalisation was necessitated by the failure of
social control.
Channel the bank finance to plan - priority sectors
Banks collect savings from the general public. If it is in the hand of private sector, the national
interests may be neglected, besides, in Five-Year Plans, the government gives priority to some
specified sectors like agriculture, small-industries etc. Thus, nationalisation of banks ensures the
availability of resources to the plan-priority sectors.
Greater mobilisation of deposits
The public sector banks open branches in rural areas where the private sector has failed. Because of
such rapid branch expansion there is possibility to mobilise rural savings.
Help to agriculture
If banks fail to assist the agriculture in many ways, agriculture cannot prosper, that too, a country
like India where more than 70% of the population depends upon agriculture. Thus, for providing
increased finance to agriculture banks have to be nationalised.
Balanced Regional development
In a country, certain areas remained backward for lack of financial resource and credit facilities.
Private Banks neglected the backward areas because of poor business potential and profit
opportunities. Nationalisation helps to provide bank finance in such a way as to achieve balanced
inter-regional development and remove regional disparities.
Greater control by the Reserve Bank
In a developing country like India there is need for exercising strict control over credit created by
banks. If banks are under the control of the Govt., it becomes easy for the Central Bank to bring
about co-ordinated credit control. This necessitated the nationalisation of banks.
Small stake of shareholders
The nationalised banks had deposits totalling Rs. 2742 crore at the end of December 1968. But the
capital contributed by their shareholders was only Rs. 28.5 crore, which was just 1% of deposits.
Even if we include the reserves, the amount comes to only 2.4% of the banks deposits with such a
small and insignificant stake, it is unjustifiable to allow the private shareholders to exercise control
over such vital credit machinery with large resources.
Greater Stability of banking structure
Nationalised banks are sure to command more confidence with the customers about the safety of
their deposits. Besides this, the planned development of nationalised banks will impart greater
stability for the banking structure.

March Forward towards Socialism

India aims at socialism. This requires the financial institutions to run under the government's
control and only through nationalisation, this objective can be effectively achieved.
Better service conditions to staff
Nationalisation ensures the staff of banks to enjoy greater job security and higher emoluments. It
can provide other benefits as well. In this way the banks can motivate their staff and thereby the
operational efficiency of banks will be increased.
New schemes
Through nationalised banks, new schemes like village adoption scheme, Lead Bank Scheme can be
formulated and implemented. Besides, different types of financial facilities can be extended to
persons like Doctors, Engineers, Self-employed persons like artisans etc.
Nationalisation of banks creates great interest among various sections of the public. Many hopes
were raised in the middle class and poor people with regard to the financial assistance. The
nationalised banks drew up a number of schemes to assist new types of customers and are plans to
make each of these banks to adopt a few select districts and concentrate on their intensive
development.

SUMMARY OF Y. H. MALEGAM COMMITTEE REPORT 2011

The RBI appointed Mr. Y. H. Malegam Committee (the Sub-Committee of the Central Board of
Directors of Reserve Bank of India to Study Issues and Concerns in the MFI Sector related to the
entities regulated by the Bank) has submitted its report to the RBI in January 2011.
The Sub-Committee composed of Shri Y.H. Malegam as Chairman, Shri Kumar Mangalam Birla,
Dr. K. C. Chakrabarty, Smt. Shashi Rajagopalan and Prof. U.R. Rao as Members and Shri V. K.
Sharma (Executive Director) Member Secretary
The terms of reference of the Sub-Committee were
1. To review the definition of microfinance and Micro Finance Institutions (MFIs) for the
purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance
by the Reserve Bank of India and make appropriate recommendations.
2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery
practices to identify trends that impinge on borrowers interests.
3. To delineate the objectives and scope of regulation of NBFCs undertaking microfinance by the
Reserve Bank and the regulatory framework needed to achieve those objectives.
4. To examine and make appropriate recommendations in regard to applicability of money
lending legislation of the States and other relevant laws to NBFCs/MFIs.
5. To examine the role that associations and bodies of MFIs could play in enhancing
transparency disclosure and best practices
6. To recommend a grievance redressal machinery that could be put in place for ensuring
adherence to the regulations recommended at 3 above.
7. To examine the conditions under which loans to MFIs can be classified as priority sector
lending and make appropriate recommendations.
8. To consider any other item that is relevant to the terms of reference.
Key recommendations:
1. A separate category be created for NBFCs operating in the Microfinance sector, such NBFCs
being designated as NBFC-MFI.
2. A NBFC-MFI is defined as A company (other than a company licensed under Section 25 of the
Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers
with loans of small amounts, for short-terms, on unsecured basis, mainly for income-generating
activities, with repayment schedules which are more frequent than those normally stipulated by
commercial banks and which further conforms to the regulations specified in that behalf. It is
suggested to define each component of this definition in the regulation.

3. The suggested conditions to be followed to classify a NBFC as a NBFC-MFI a). Not less than 90%
of MFIs total assets (other than cash and bank balances and money market instruments) are in the
nature of qualifying assets. b)The criteria suggested to be satisfy the qualifying asset of NBFC-

does not exceed Rs. 50,000; ii)the amount of the loan does not exceed Rs. 25,000 and the total
outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000; iii)
the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000
and 24 months in other cases with a right to the borrower of prepayment without penalty in all
cases; iv) the loan is without collateral; v) the aggregate amount of loans given for income
generation purposes is not less than 75% of the total loans given by the MFIs; vi) the loan is
repayable by weekly, fortnightly or monthly installments at the choice of the borrower. c) The
income it derives from other services is in accordance with the regulation specified in that behalf.
4. A NBFC which does not qualify as a NBFC-MFI should not be permitted to give loans to the
microfinance sector, which in the aggregate exceed 10% of its total assets.
5. The Committee recommended a margin cap of 10% in respect of MFIs which have an
outstanding loan portfolio at the beginning of the year of Rs. 100 crores and a margin cap of 12%
in respect of MFIs which have an outstanding loan portfolio at the beginning of the year of an
amount not exceeding Rs. 100 crores. It also recommended an interest cap of 24% on individual
loans.
In respect of transparency in Interest Charges, the committee has suggested the following
recommendations:
a) There should be only three components in the pricing of the loan, namely (i) a processing fee,
not exceeding 1% of the gross loan amount (ii) the interest charge and (iii) the insurance
premium.
b) Only the actual cost of insurance should be recovered and no administrative charges should
be levied.
c) Every MFI should provide to the borrower a loan card which (i) shows the effective rate of
interest (ii) the other terms and conditions attached to the loan (iii) information which
adequately identifies the borrower and (iv) acknowledgements by the MFI of payments of
installments received and the final discharge. The Card should show this information in the
local language understood by the borrower.
d) The effective rate of interest charged by the MFI should be prominently displayed in all its
offices and in the literature issued by it and on its website.
e) There should be adequate regulations regarding the manner in which insurance premium is
computed and collected and policy proceeds disposed off.
f)

There should not be any recovery of security deposit. Security deposits already collected if
any should be returned.

g) There should be a standard form of loan agreement.

7. In order to minimize the adverse features of Multiple-lending, Over-borrowing and Ghostborrowers, the committee has made the following recommendations.
a) MFIs should lend to an individual borrower only as a member of a JLG and should have the
responsibility of ensuring that the borrower is not a member of another JLG.

b) a borrower cannot be a member of more than one SHG/JLG.

c) not more than two MFIs should lend to the same borrower.
d) there must be a minimum period of moratorium between the grant of the loan and the
commencement of its repayment.
e) recovery of loan given in violation of the regulations should be deferred till all prior existing
loans are fully repaid.

8. All sanctioning and disbursement of loans should be done only at a central location and more
than one individual should be involved in this function. In addition, there should be close
supervision of the disbursement function.
9. It is recommended to establish one or more Credit Information Bureaus (CIB) and all MFIs are
required to become members of such bureau. Till the operation of CIB, the responsibility to obtain
information from potential borrowers regarding existing borrowings should be on the MFI.
10. In case of coercive methods used in recovery, the MFIs and their managements should be
subject to severe penalties. b) The regulator should monitor whether MFIs have a proper Code of
Conduct and proper systems for recruitment, training and supervision of field staff to ensure the
prevention of coercive methods of recovery. Field staff should not be allowed to make recovery at
the place of residence or work of the borrower and all individual loans.
11. The minimum net worth recommended for NBFC-MFI is Rs.15 crore.
12. Every MFI should be required to have a system of Corporate Governance in accordance with
rules to be specified by the Regulator.
13. Provisioning for loans should not be maintained for individual loans but an MFI should be
required to maintain at all times an aggregate provision for loan losses which shall be the higher of:
(i) 1% of the outstanding loan portfolio or (ii) 50% of the aggregate loan installments which are
overdue for more than 90 days and less than 180 days and 100% of the aggregate loan installments
which are overdue for 180 days or more.
14. NBFC-MFIs should be required to maintain Capital Adequacy Ratio of 15% and all of the Net
Owned Funds should be in the form of Tier I Capital.
15. Bank lending to the Microfinance sector both through the SHG-Bank Linkage programme and
directly should be significantly increased and this should result in a reduction in the lending
interest rates.
16. Bank advances to MFIs shall continue to enjoy priority sector lending status. However,
advances to MFIs which do not comply with the regulation should be denied priority sector
lending status. It may also be necessary for the Reserve Bank to revisit its existing guidelines for
lending to the priority sector in the context of the Committees recommendations.
17. In respect of assignment and securitization, MFI portfolio, the following are the
recommendations:

a) Disclosure is made in the financial statements of MFIs of the outstanding loan portfolio
which has been assigned or securitised and the MFI continues as an agent for collection. The
amounts assigned and securitised must be shown separately.
b) Where the assignment or securitisation is with recourse, the full value of the outstanding
loan portfolio assigned or securitised should be considered as risk-based assets for calculation of
Capital Adequacy.
c) Where the assignment or securitisation is without recourse but credit enhancement has
been given, the value of the credit enhancement should be deducted from the Net Owned Funds
for the purpose of calculation of Capital Adequacy.
d) Before acquiring assigned or securitised loans, banks should ensure that the loans have
been made in accordance with the terms of the specified regulations.

18. It is recommended to examine the creation of one or more "Domestic Social Capital Funds" in
consultation with SEBI to fund MFIs. Further, MFIs should be encouraged to issue preference
capital with a ceiling on the coupon rate and this can be treated as part of Tier II capital subject to
capital adequacy norms.

19. In order to monitor the Compliance, the following recommendations are made
a) The primary responsibility for ensuring compliance with the regulations should rest with
the MFI itself and it and its management must be penalized in the event of non-compliance
b) Industry associations must ensure compliance through the implementation of the Code of
Conduct with penalties for non-compliance.
c) Banks also must play a part in compliance by surveillance of MFIs through their branches.
d) The Reserve Bank should have the responsibility for off-site and on-site supervision of
MFIs but the on-site supervision may be confined to the larger MFIs and be restricted to the
functioning of the organizational arrangements and systems with some supervision of branches. It
should also include supervision of the industry associations in so far as their compliance
mechanism is concerned. Reserve Bank should also explore the use of outside agencies for
inspection.
e) The Reserve Bank should have the power to remove from office the CEO and / or a
director in the event of persistent violation of the regulations quite apart from the power to
deregister an MFI and prevent it from operating in the microfinance sector.
f) The Reserve Bank should considerably enhance its existing supervisory organisation
dealing with NBFC-MFIs.

20. The exemption from the provisions of State Money Lending Acts was recommended on account
of interest margin caps and increased regulation suggested by the Committee

21. In respect of The Micro Finance (Development and Regulation) Bill 2010, the committee subject
to Smt.Rajagopalan's reservations above, recommend the following:
a) The proposed Act should provide for all entities covered by the Act to be registered with the
Regulator. However, entities where aggregate loan portfolio (including the portfolio of associated
entities) does not exceed Rs. 10 crores may be exempted from registration.
b) If NABARD is designated as the regulator under the proposed Act, there must be close coordination between NABARD and Reserve Bank in the formulation of the regulations applicable to
the regulated entities.
c) The micro finance entities governed by the proposed Act should not be allowed to do the
business of providing thrift services.
22. The Committee also felt that the need for a separate Andhra Pradesh Micro Finance
Institutions (Regulation of Money Lending) Act will not survive if the Committees
recommendations are accepted,

23. The cut-off date suggested for implementation of the recommendations is April 1st, 2011. In
particular, the recommendations as to the rate of interest, it is recommended that it should be made
effective to all loans given by an MFI after March 31st 2011.

Nariman Committee
A study group on Organisational Framework for the Implementation of Social Objective had
recommended an Area Approach to be followed by commercial banks to promote economic
development of backward areas in the country. The Committee of Bankers (Known as the Nariman
Committee) appointed by the Reserve Bank of India in 1969 accepted the area approach and
gave a practical shape to it under the title Lead Bank Scheme.

PARTICIPANTS
Participants of Lead bank Scheme in every district is Commercial Banks, RRBs, Co-operative Banks
and Other Financial Institutions such as RBI, NABARD and Development Agencies of the
Government.
A Committee of Bankers on Branch Expansion Programme of public sector banks appointed by
Reserve Bank of India under the Chairmanship of Shri F. K. F.Nariman (Nariman Committee)
endorsed the idea in November 1969. It also recommended that each bank can concentrate on
certain districts where it should act as a 'Lead Bank'.
NECESSITIES OF LEAD BANKS
The development of rural economy has been accepted as an integral part of the main strategy in the
Seventh Five Year Plan. The basic importance of Lead Bank Scheme is that individual banks should
adopt particular district for intensive development. The lead bank acts as a leader for coordinating

the efforts of all credit institutions in the allotted districts to increase the flow of credit to
agriculture, small-scale industries and other economic activities.
REFORMS OF LEAD BANKS
In the changed context of financial sector reforms, the validity of the LBS is being questioned in
some quarters of the banking circle. RBI in consultation with NABARD devised the Lead Bank
Returns (LBRs) in the year 1991 which replaced the Lead Bank Statements (LBS) prescribed for
Banks under the Lead Bank Scheme.
Service Area Approach (SAA) was introduced in 1989 under which villages were identified and
assigned to bank branches based on their proximity and contiguity. Credit plans were prepared on
an annual basis for the service area of each branch which involved co-ordination between the
various developmental agencies and credit institutions.
SLBC facilitates effective implementation of development programmes in the areas of poverty
alleviation, employment to un-employed, providing banking outlet in un-banked areas, training,
financial literacy etc. The role of SLBC is reinforced by the High Level Committee constituted by
RBI to review Lead Bank Scheme.
State Level Bankers Committee (SLBC) came into existence under Lead Bank Scheme as per RBI
guidelines. SLBC is an inter-institutional forum at State level ensuring co-ordination between
Government and Banks on matters pertaining to banking development.
High Level Committee on Lead Bank Scheme
In 2007 a High Level Committee was constituted under the chairpersonship of Smt. Usha Thorat,
Deputy Governor, Reserve Bank of India to review the Lead Bank Scheme which was initially
introduced in December 1969.
The High Level Committee, which submitted its final recommendations in August 2009,
announced that The overarching objective of Lead Bank Scheme shall be to enable banks and
State Governments to work together for inclusive growth. The Committee also advised Banks to
focus attention on the urgent need for achieving 100% financial inclusion through penetration of
banking services in the rural areas. RBI has accepted the recommendations of the High Level
Committee and advised action areas to SLBC Convenors and Banks for implementation.