One of the Members opposite pointed out that I have publicly voiced the deficiencies of the public sector. But I have also said, and I believe, that the debate about the relative merits of the public and private sectors is rather artificial. Both play an important role in our economy. (Interruption)
But when I criticise the public sector, I do not want the private sector to be perceived as the epitome of virtue. In fact, the track record of the private sector is not one that inspires inspiration or enthusiasm. And if this ignorant lobbying continues, as my colleague, the Minister of Justice, stated the other day, the Government has ample evidence of the dire situation prevailing in various parts of the private sector. I therefore make a serious request to those who daily ridicule the public sector (interruption). [and] Let’s make an effort every day and act with greater responsibility and prudence.
The more I examine how most of the commercial banks in the country were functioning, the more I am of the view that the measures we are discussing in this House were inevitable and absolutely necessary. I would like to remind this House and those Members who opposed this measure that there is a crucial difference between banking and other industries. My friend Chandra Jeet Yadav, MP, also made this point. The financial interest of the shareholders of the banks is almost negligible. The paid-up capital and reserves of the 14 banks constituted a mere 2.4 per cent of the deposits. As of December 31, 1968, the total deposits of these banks was nearly Rs 275 billion, but their paid-up capital was only Rs 285 million, or a little over 1 per cent.
Bank management thus operated almost entirely with other people’s money. This aspect of banking has always been a source of concern, even in countries that do not profess to be socialist. Indeed, as you know, some countries with predominantly capitalist economies have thought it appropriate to nationalize banks or to subject them to very strict supervision.
France decided that it was necessary to nationalize its banks, and nationalization laws were passed. [on] In two days, with little debate, the six biggest banks were nationalised, four were nationalised and two were left out for one reason or another. These two banks together have just one-twentieth of France’s banking assets. Similarly, in Italy, four of the five biggest banks belong to the state sector.
In Sweden, the government took over the capital of two banks and merged them in 1950. Frankly, the rather outrageous statements that have been made about these measures and their predicted results are hard to understand. People have raised the issue of social control and asked why it had not been tried for a longer period. Social control had many useful features that are still valid today, such as the emphasis on professional management. It also gave high priority to agriculture, exports and small businesses.
But the weakness of social control was that in many banks, those who had controlled the policies of the banks in the past continued to exercise some form of influence over them, sometimes with the continued presence of former chairmen and vice-chairmen on the boards of these banks. Banks may follow the instructions and directions given to them, as some of the banks did. But there is a huge gap between those who implement policies with whole heart and enthusiasm and those who do so only because they have specific instructions. But some of the banks did not even follow the instructions given to them. We cannot continue to ignore the frustration and dissatisfaction of the less fortunate in our efforts to help them become self-reliant.
Questions have also been raised as to why foreign banks have not been included in the Act. Foreign banks are part of global organisations and can provide special facilities and services to exporters and importers, but Indian banks do not have a sufficient overseas branch network to provide these services.
Surendranath Dwivedi: Are they regulating the operations of foreign banks just for this purpose?
Indira Gandhi: More on this later. Foreign banks also have intimate knowledge of the countries to which their Indian clients issue export bills. Foreign banks therefore play a unique role in raising and managing foreign currency loans on behalf of their parent companies, serving tourists, and disseminating information about business opportunities in India and other countries in which they operate. At the same time, foreign banks are heavily regulated. One of the rules adopted is to restrict foreign banking only to port cities and only to those foreign banks that have established branches in the hinterland.
Surendranath Dwivedi: Grindlays Bank has 53 branches.
Indira Gandhi: Banks which had earlier opened branches in the hinterland have been allowed to operate outside the port cities. The Reserve Bank of India will allow foreign banks to expand only if it deems it necessary so that they can serve Indian consumers more efficiently in financing foreign trade and tourism. Another criticism was about the exclusion of small banks. The objective of nationalisation is to promote rapid growth in agriculture, small and medium enterprises and exports, encourage new entrepreneurs and develop all backward regions. Banks with deposits of over Rs 500 crore have branches in many states. In contrast, the operations of small banks are limited to certain geographies. The 14 banks we have acquired are better placed to carry out the government’s objectives than the small banks as they have a wider coverage.
Small banks already cater primarily to small borrowers, as evidenced by their much smaller average lending account size. Small banks are part of the communities in which they operate, and small businesses and small industrialists have some say in how their businesses operate. There is already some differentiation between large and small banks with respect to some regulations.
We are not going to set up a single central authority to run all these banks. We need to strengthen the central machinery, but each bank will have autonomy and its board will have clearly defined powers. We will give instructions, but they will be on policy and general issues, not on specific loans to specific entities. We will be vigilant against the risk of undue interference, whether for political or other reasons. One member of parliament said that these 14 banks will be outside the jurisdiction of the Central Bank. This is not true at all, because these banks will remain scheduled banks and so will the Central Bank’s powers.
This does not make central banks irrelevant. In fact, they can become more important and relevant, and their institutions may need to be strengthened and given a new, clearer direction. I completely agree with the members of parliament who said they should not be bureaucratized. We need to preserve the initiative, motivation and identity of these banks.
We will prepare a plan, submit it to Parliament and then exercise the power of reorganization. But we want to do this in a way that does not exclude healthy competition and spontaneity. Outside the parliament, there is talk that the Communist Party is leading the way. I think that I should warn the members of the parliament to be a little careful with such statements, because they will be in the same camp as the Chinese news agencies. If the far-left parties respond to this era, they will be in the company of the Naxalites or worse.
Madhu Limaye: That’s nonsense.
Indira Gandhi: At the moment, the language used by some lawmakers is exactly the same as that used by Chinese news agencies.
Perhaps some lawmakers [a] I feel guilty. In any case, I would like to take this opportunity to assure our shareholders that the compensation we have offered is fair and equitable. And, as the Minister of Law has explained, we are working to make the payment of compensation to the actual shareholders as soon as possible. One member of parliament said that payment in the form of government bonds would create hardship for shareholders. I would like to strongly refute this. Very recently, the Government of India issued loans at 4 percent interest to be repaid in 7 years. These securities are selling at a slight premium in the market. 30-year loans at 1 percent interest are also selling at a premium. Any member of parliament suggesting that this new security means loss of capital for shareholders is making a most dangerous and irresponsible statement.
Also, the poorer sections of society may find themselves in doubt as to the true value of their assets and be forced to part with them at less than their fair value. I would like to refrain from making any statements in Parliament which could lead to such exploitation. Negotiable securities are saleable and should be sold at a price that does not cause any loss. I would like to assure the management and staff of banks that we will safeguard their legitimate interests and expect courtesy and cooperation from them.
Going forward, we will refrain from taking an inflammatory approach that ignores the interests of the country and the banking industry, and we expect that labor and management will act in a cooperative and responsible manner.
This is part of ThePrint’s Great Speeches series, featuring speeches and debates that shaped modern India.
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