Shedding govt stake may not make banks efficient, says Jairam Ramesh

He said there were compelling reasons for bank nationalisation. The timing was political

Amid corporate governance issues in ICICI Bank, veteran Congress leader Jairam Ramesh tells Ishan Bakshi that he is not sure whether bringing  government stake below 50 per cent would bring in accountability in the banking system.  Ramesh, who has authored a book titled ‘Interwined Lives’, talks about the days of bank natinalisation, Indira Gandhi and PN Haksar, among others. Edited excerpts:

In light of the current state of public sector banks, do you think nationalisation of banks is a correct decision? 

I think there were compelling reasons for bank nationalisation. The timing was political. But the rationale was economic. Interestingly, both Indira Gandhi and PN Haksar were cautious on nationalisation. Between 1967 and 69, they were talking of social control, of credit planning. It’s only in the first 10 days of July in 1969 that Haksar finally makes up his mind and then Indira Gandhi makes up her mind. On July 19, 1969, banks were nationalised, incidentally through an ordinance.

There’s a very interesting letter that Haksar writes to Dr Manmohan Singh, after the joint parliamentary committee (JPC) for the Harshad Mehta scam was established. In 1994, he writes to Singh saying he wished that he would have been asked to depose before the JPC. 

He would have told it how the appointments were politicised in the banking system, including that of the Reserve Bank of India (RBI), during Emergency. He says that original objectives of nationalisation remained valid. However, this business of politicising appointments disturbed him. 

Have the economic and social objectives of nationalisation been met over the past decades? 

Yes. I think so. I think the public sector banking system as a whole has played a very important role. Take one area that I’m very conversant with – had it not been for the public sector banks, the entire bank-linked self-help group movement in India would not have taken off. 

Incidentally, one of the reason why I was rather ambivalent on the merger of the State Bank of India (SBI) with its associate banks is because I have seen with my own eyes how banks like the State Bank of Hyderabad and Mysore played important roles in specific regions. I’m not a great advocator of the denationalisation of banks 

I’m ambivalent on Air India. I’m willing to say that perhaps Air India should go into private hands because we have better things to do than run airlines. 

But on the banking system, I’m still an old-time believer that the government needs to retain more than 50 per cent. I know there is an argument – Yashwant Sinha bought a Bill in Parliament based on the Narasimhan committee – where he said that you could bring down the government stake to 33 per cent and still retain the public sector character. 

Now what’s the public sector character? 

The public sector character is through two ways – one through appointments and the other through priority sector targets.  Now, the argument in the Narasimhan committee was that you can meet your priority sector targets through the RBI. But the appointments would not be done by the government.

However, seeing what has happened to governance in ICICI, it’s not entirely clear to me that reducing government stake to below 50 per cent is an automatic route to accountability and efficiency.

Many would argue that it’s because of the appointments? This is because there is little accountability in the system.

If you look at all the people working in the state banks, they are first rate people. Look at all the people in the private sector. At some point, they have worked in the public sector. I don’t deny the fact that very often politics plays an important role in not only the appointments of the executives but also in the appointments of the board members. 

And every political party has been guilty of this. I don't think any political party can take the high moral ground and say that we have appointed only professionals to the boards.