Political Over Reach By Election Commission, Reserve Bank Governor

Governor of RBI has ventured the unacceptable proposition that granting bank business is not in any way a political process. This stand is totally unacceptable both in principle and in law.

All parties have broadly agreed on various aspects of the model code worked out by the Election Commission for a certain period before the elections — it has worked quite satisfactorily. Fortunately the Election Commission still remains in command. Recently it denied the Central government the right to make certain changes in some economic and subsidy policies (though the later would adversely affect the poorer sections of society) its neutrality was not challenged. It has, therefore, come as a shock to many of us that since Banks Nationalisation in 1969 though only two licences in private sector have been allowed, the matter has been made controversial by RBI by deciding to issue two fresh licences. More astonishing is the comment by Governor, RBI, that giving bank licences is not in any way a political process. This plea is unacceptable in political circles because it cannot be forgotten that the economic crisis in 1969 created by private banks fiasco was avoided by the nationalisation of major banks. (Of course there was a political angle in Indira - Morarji Desai power struggle at that time.) Since then, however, the Central government with even different political parties formation has taken place. But sensing the public indignation at allowing corporate sector to set up banks, no Central government seriously even remotely broached the idea of change of policy.

It was only is 2011 that the UPA Government, known to be under big corporate sector pressure, announced, though in low key, a policy for new banks in the 2011 budget, but did not dare seriously follow it up.

Reserve Bank Governor, who evidently is a follower of Chicago school of economics of unadulterated private sector economy, was keen to go ahead with privatisation, but the Ministry of Finance opposed it, even Mr. Chidambaram, no doubt also a believer in Chicago School of Economic policy (1990) opposed it, realising the political dynamite of privatization. But the RBI Governor, nevertheless, referred this matter to the Election Commission. One would have expected an immediate curt negative from the Election Commission for the obvious reason that banks nationalisation is one of the most explosive political decisions, and which only an elected government is competent to modify. By what logic Election Commission has permitted the RBI the liberty to take decision independent of the government on such a delicate financial, economic and political policy is beyond comprehension.

Governor of RBI has ventured the unacceptable proposition that granting bank business is not in any way a political process. This stand is totally unacceptable both in principle and in law. RBI can only move in after the Central government has taken a political decision to allow private banking - and this decision, if at all can only be taken after the elections and when a new government has taken over.

Such a change of policy requires full fledged debate not only in legislatures but in the political circles as well. It cannot be done quietly at a bureaucratic level.

The unexplained hurry by Governor, RBI to issue two private Licences defies logic. It is not as if service by private banks is helping the needy. Statistics show that 27 State-run banks account for 75% of total deposits and 73% of total credit. If analysed in depth the private banks service its own private clients and have no public purpose. As a matter of fact in the last couple of years even in USA biggest banks like Bank of America were saved from bankruptcy by the US Government lending huge amounts of money to them.

A fallacious argument in favour of privatisation of banks that they are less likely to default and therefore are a less burden on the public finance has been authoritatively negatived by the International Monetary Fund (IMF) which has warned that the world’s biggest banks still get a total of about 590 billion dollars in subsidies from their governments. In that light, this action of giving licence for private banking by RBI is mystifying. This decision has already been adversity commented by Members of Parliament and they have warned that RBI should have waited, as decision had to be taken by the new government after general elections and they have warned that they would revisit the issue of new bank licences.

Bank Nationalisation is a matter of government policy — the Supreme Court in the Bank Nationalisation case (1970) specifically refused to consider the argument of private bankers that under the scheme of social control exercised by Reserve Bank of India, the commercial banks had achieved impressive results comparing favorably with the performance of State banks of India. The Supreme Court said thus,

"This Court is not the forum in which these conflicting claims may be debated. Whether there is a genuine need for banking facility in the rural sector... whether administration by the Government of the commercial banking sector will not prove beneficial to the community and will lead to rigidity in the administration, whether the Government administration will eschew the profit-motive, and even if it be eschewed, there will accrue substantial benefits to the public... and whether the policy followed by the Government in office or the policy propounded by its opponents may reasonably attain the national objectives are matters which have little relevance in determining the legality of the measure. It is again not for this Court to consider the relative merits of the different political theories or economic policies.... This Court has the power to strike down a law on the ground of want of authority, but the Court will not sit in appeal over the policy of the Parliament in enacting a law. The Court cannot find fault with the Act merely on the ground that it is inadvisable to take over the undertaking of banks which, it is said by the petitioner, by thrift and efficient management had set up an impressive and efficient business organisation serving large sectors of industry."

I feel strongly that Governor, RBI should immediately withdraw the permission so as not to create unnecessary lack of confidence and want of rapport between RBI and the new government.

Already there is a bias against public sector - this is clear from the fact that none of major political parties though at each others throats in their election offensive has even remotely praised public sector; rather all are promising to encourage private sector - ironically forgetting compulsion for socialism highlighted in the preamble to our Constitution.

Rajindar Sachar is former Chief Justice of the Delhi High Court and chaired the Sachar Committee.

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