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Monday, February 07, 2000



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Indira Gandhi versus Morarji Desai -- The real reason for bank nationalisation

R. J. Venkateswaran

THE nationalisation of major commercial banks in July 1969 was one of the crucial decisions taken by the then Prime Minister, Indira Gandhi. For many years, the Left parties and some radical Congressmen had persistently demanded nationalisation to preven t concentration of wealth in private hands and to mobilise more resources for economic development. The government, however, did not favour outright nationalisation because that would involve payment of large-scale compensation to shareholders of banks, and would create other complications due to the lack of adequate and competent technical personnel. The Government, therefore, decided to introduce social control over them without actually owning these institutions.

Banking industry representatives argued that social control was not necessary because the Reserve Bank of India had been vested with effective and extensive powers over almost every aspect of banking, including management, supervision, regulation of expa nsion and control of credit. The RBI could appoint or dismiss any chairman or director of a bank and lay down the terms and service conditions for the chief executives. It could inspect banks thoroughly, and its approval was necessary for all advances of Rs. 1 crore and above to any borrower. It could regulate the opening of branches and the formation of mergers and direct all aspects of the credit policies of commercial banks.

The record of commercial banks in serving the economy by stimulating savings was claimed to be commendable. They had also provided timely and adequate credit to the small-scale sector. But these arguments did not convince Indira Gandhi's government; it w anted to enfeeble the private industrial sector, which had built up close connections with banks.

The main features of the social control scheme were the establishment of a National Credit Council, with the Finance Minister as the Chairman, and representatives of agriculture, trade, industry, banks and professional groups. The RBI was given additiona l powers, and the boards of directors of banks were reconstituted with a majority of non-industrialists.

The social control came into force from February 1, 1969, with the enactment of the Banking Laws Amendment Bill. But the banks started implementing the scheme even before the Bill became law. By the beginning of July 1969, all the 15 banks with deposits of Rs. 25 crores and above, which were required to reorganise their boards and appoint whole-time chairmen, had done so. These banks represented 77 per cent of the total deposit business in the private sector. The other Indian and foreign banks also init iated the necessary changes to comply with the regulations of the Banking Laws Amendment Act.

The Indian public generally seemed satisfied with the working of the social control over banks. But the Left parties continued to agitate for nationalisation. In fact, at the all-India Congress Committee meeting in Faridabad in April 1969, Indira Gandhi stoutly opposed this proposal. She pleaded for a fair trial to the scheme of social control. She made it clear that she was not opposed to nationalisation but pointed out that there was not enough manpower to run the banks if they were nationalised.

Though Indira Gandhi expressed such views in April, in July she advocated the nationalisation of banks in the note submitted to the All-India Congress Committee meeting held in Bangalore. Her actual words on this subject were: ``There is a great feeling in the country regarding the nationalisation of private commercial banks. We can consider the nationalisation of a few top banks or issue directions that the resources of banks should be reserved to a larger extent for public purposes.''

Indira Gandhi suggested that the banks' investment in government securities be raised on the average for both slack and busy seasons by about 5 per cent. She estimated that this would make available about Rs. 200 crores for the public sector. This amount might be utilised for quick-yielding schemes, such as minor irrigation programmes, rural electrification and fisheries.

Indira Gandhi said that even after the new policy of social control and reconstitution of the boards of directors, the former industrial chairmen of the bank still continued on the boards and influenced the present chairmen who had previously been genera l managers. ``We may examine'', she said, ``whether through legislation or otherwise we can prevent such men from continuing on the board. The chief executives of the banks will not been then feel obliged to the former chairmen and they may be expected t o take an independent line in regard to lending.'' She, therefore, favoured nationalisation. But Morarji Desai, Finance Minister and Deputy Prime Minister, opposed the proposal.

In a note issued on July 10, he said: ``Recent experience does not suggest that the large banks need to be taken over so as to be made to do something which they are not doing. There is no reason why, under social control, they cannot be made to do what the State Bank is doing if that is in the national interest. Nor is it right that the State Bank should be expected to do what banks, as institutions concerned with the safety of their depositors' funds, cannot do. Mere nationalisation will not provide m ore resources.''

Morarji Desai argued that as the banks were custodians of the people's savings, it was only natural that they should exercise considerable care in deploying the funds entrusted to them while, at the same time, making credit available in accordance with n ational priorities. He stressed that no bank, whether in the private or the public sector, could abandon the test of viability of a credit transaction.

He observed: ``The experiment of social control is a continuing one. It aims at socialisation of credit without nationalisation of banking. Our experience in the past year or so has shown that it is an experiment whose results, we have every reason to be lieve, will be rewarding.''

After announcing the decision to nationalise the 14 banks on July 29, 1969, Indira Gandhi herself took over the Finance portfolio, thereby making it difficult for Morarji Desai to remain in the Cabinet. When he expressed his strong resentment at her acti on, she told him he could continue in the Cabinet as Deputy Prime Minister and hold charge of some other portfolio. Morarji Desai described it as ``an amazing proposal and a very clever move'', and he conveyed his inability to continue in the Cabinet.

Morarji Desai wrote to her: ``If you wanted a change in the Finance Ministry, you could have discussed it with me. You know very well that I never discussed any matter with you in an improper manner. Even when I have differed from you on some matters, I have never been guilty of impropriety or discourtesy. But now you have behaved towards me in a manner in which no one would behave even with a clerk''.

Later, Indira Gandhi told a meeting of the Congress Parliamentary Party that she had taken over Finance as she wanted to gain experience of that Ministry. Morarji Desai observed that if that was indeed the real reason, he would have willingly agreed to t he strategy solely to get him removed from the Cabinet. Indira Gandhi felt that so long as Morarji Desai continued to hold the key finance portfolio, she would not be able to have her way in shaping and implementing policies. He had vast political, parli amentary and administrative experience and enjoyed immense prestige in the Congress Party.

Three decades have passed since the banks were nationalised. But the benefits of this measure are yet to be fully realised. Several committees and study teams have examined the working of the banking sector. But the Government has been unable and unwilli ng to implement most of their recommendations.

For instance, the Narasimham Committee pointed out several deficiencies in banking in its report issued in 1991. It said: ``Management weaknesses and trade union pressures have seriously undermined the efficiency of banks and financial institutions''. It referred to the ``lack of sufficient delegation of authority, inadequate internal control in respect of balancing of books and reconciliation of inter-branch and inter-bank entries.''

The Committee asserted that banks had ceased to be competitive and innovative. It recommended that new skills needed to be developed and new areas of expertise identified. An increasingly complex and sophisticated financial system called for new concepts of management, professional decision-making and modernisation.

But in the context of the strained atmosphere between the Government and the unions, the outlook for the banking sector does not seem as bright as it should be, particularly given the challenges in the new millennium.

(The author is a Calcutta-based freelance writer.)

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