12/29/2010 Indira Gandhi versus Morarji Desai -- …

Financial Daily
from THE HINDU group of publications
Monday, February 07, 2000

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BUSINESS
• COMMODITIES
• CORPORATE
• INFO-TECH Indira Gandhi versus Morarji Desai -- The
• LIFE
• LOGISTICS real reason for bank nationalisation
• MENTOR
• MONEY R. J. Venkateswaran
• NEWS
• OPINION THE nationalisation of major commercial banks in July
• INFO-TECH 1969 was one of the crucial decisions taken by the
• CATALYST then Prime Minister, Indira Gandhi. For many years, the
• INVESTMENT Left parties and some radical Congressmen had
WORLD persistently demanded nationalisation to preven t
• MONEY & concentration of wealth in private hands and to
BANKING mobilise more resources for economic development.
• LOGISTICS The government, however, did not favour outright
nationalisation because that would involve payment of
• PAGE ONE large-scale compensation to shareholders of banks,
• INDEX and would create other complications due to the lack
• HOME 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.

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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
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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

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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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