Social Control over Banks

Social Control over Banks refers to a significant policy phase in the evolution of the Indian banking system during the late 1960s, when the Government of India sought to regulate and guide the functioning of private commercial banks to serve broader socio-economic objectives. Positioned within the larger framework of banking, finance, and the Indian economy, social control represented an intermediate stage between privately driven banking and full-scale bank nationalisation. Its primary purpose was to align the credit policies and management of banks with the goals of planned economic development and social justice.
This policy emerged from growing dissatisfaction with the concentration of banking resources in a few hands and the limited contribution of commercial banks to priority sectors such as agriculture, small-scale industries, and rural development. Social control aimed to transform banks into instruments of economic policy without immediately transferring ownership to the state.

Economic and Historical Background

In the post-independence period, India adopted a planned development strategy with a strong public sector orientation. Although the number of commercial banks expanded, their operations remained largely urban-centric and industry-focused. Credit was predominantly extended to large industrial and business houses, while vast sections of the economy remained dependent on informal sources of finance.
By the mid-1960s, the Indian economy was facing severe challenges, including food shortages, inflationary pressures, and slow industrial growth. These difficulties exposed structural weaknesses in the financial system and highlighted the inability of private banks to support national development priorities. Against this backdrop, policymakers began to emphasise the need for greater public oversight of banks, leading to the introduction of social control.

Meaning and Concept of Social Control

Social control over banks refers to a regulatory and policy framework in which banks remain privately owned but their management, credit allocation, and operational priorities are guided by the state in the public interest. The objective was to ensure that banking decisions were not solely influenced by profit considerations but also by social and developmental needs.
Under social control, the government sought to influence banks through indirect means such as changes in board composition, policy directives, and strengthened regulatory supervision. This approach was intended to correct distortions in credit distribution while preserving the efficiency and managerial autonomy of private banks.

Introduction of Social Control Policy

The policy of social control over banks was formally introduced in December 1967 by the Government of India. It applied to major commercial banks and was implemented in coordination with the Reserve Bank of India, which played a central role in supervising and guiding banking operations.
The policy marked a decisive shift in the relationship between the state and the banking sector. It reflected the belief that banks, as custodians of public savings, had a responsibility to contribute to national economic objectives rather than merely serve the interests of a narrow segment of society.

Key Features of Social Control over Banks

The framework of social control involved several institutional and policy measures aimed at reorienting banking behaviour.
Important features included:

• Reconstitution of bank boards to include professionals and representatives with a public interest orientation.
• Reduction of the influence of large industrial and business houses in bank management.
• Emphasis on lending to priority sectors such as agriculture, small-scale industries, exports, and weaker sections.
• Strengthening of credit planning and coordination between banks and government agencies.
• Enhanced regulatory oversight to monitor compliance with policy objectives.

These measures were intended to democratise bank management and ensure a more equitable allocation of financial resources.

Objectives of Social Control

The policy of social control over banks was guided by multiple economic and social objectives, reflecting the developmental philosophy of the Indian state.
Major objectives included:

• Preventing concentration of economic power and misuse of bank credit.
• Ensuring wider and more balanced distribution of credit across regions and sectors.
• Promoting rural development and agricultural finance.
• Supporting small and medium enterprises and self-employment.
• Integrating banking policy with national development plans.

Through these objectives, social control sought to redefine the role of banks as agents of socio-economic transformation.

Impact on the Banking System

Social control brought about a gradual change in the orientation of Indian banks. It initiated the process of viewing banking as a public service rather than a purely commercial activity. Banks began to expand their branch networks, especially in semi-urban and rural areas, and made tentative efforts to increase lending to priority sectors.
However, the impact of social control was limited by the continued private ownership of banks and resistance from entrenched management structures. While policy intentions were clear, their translation into effective credit redistribution remained uneven and slow.

Limitations and Criticism

Despite its progressive intent, social control over banks faced several criticisms. The absence of direct state ownership constrained the government’s ability to enforce policy directives effectively. Many banks continued to prioritise profitability and maintained close ties with industrial groups.
Key limitations included:

• Inadequate enforcement of priority sector lending.
• Limited reduction in concentration of credit.
• Slow pace of rural banking expansion.
• Structural and managerial resistance within banks.