The existence of a complex structure of interest rates arising from economic and social concerns of providing concessional credit to certain sectors resulted in "cross subsidisation" which implied that higher rates were charged from non-concessional borrowers.
The regulation of lending rates, led to regulation of deposit rates to keep cost of funds to banks at reasonable levels, so that the spread between cost of funds and return on funds is maintained.
The system of administered interest rates was characterised by detailed prescription on the lending and the deposit side leading to multiplicity and complexity of interest rates.
By the end of the eighties, the financial system was considerably stretched. The directed and concessional availability of bank credit with respect to certain sectors resulted not only in distorting the interest rate mechanism, but also adversely affected the viability and profitability of banks.
The lack of recognition of the importance of transparency, accountability and prudential norms in the operations of the banking system led also to a rising burden of non-performing assets.
In sum, there was a de facto joint family balance sheet of Government, RBI and commercial banks, with transactions between the three segments being governed by plan priorities rather than sound principles of financing inter-institutional transactions.
There was a widespread feeling that this joint family approach, which sought to enhance efficiency through co-ordinated approach, actually led to loss of transparency, of accountability and of incentive to measure or seek efficiency.
Thus, the post-nationalisation phase witnessed significant branch expansion to mobilise savings and there was a visible increase in the flow of bank credit to important sectors like agriculture, small-scale industries, and exports.
However, these achievements have to be viewed against the macro-economic imbalances as well as gross inefficiencies at the micro level in the financial sector compounded by non-transparent accounting of intra-public sector financial transactions.
