For all economies in the early and intermediate stages of development, credit markets face a persistent excess demand, reflecting the existing resource constraints. Moreover, market processes can well exclude the genuine credit needs of the weaker sections of society which do not have the competitive strength to bid for funds in the market for bank credit.
Public ownership in Indian banking was intended to address both concerns i.e., the rationing of credit in the face of excess demand not cleared by the market, and the channelling of bank credit flow to the economically disadvantaged sections of society. Over the period 1970-90, a massive expansion of bank branches occurred, and credit allocations ensured some equity in the distribution of bank credit.