Former SEBI chairman M Damodaran has held political influence in sanctioning of loans by banks responsible for bad loans and ownership troubles at public sector banks. This is called "directed lending," he said.

“Telephone calls from Delhi to Bombay [Mumbai] over the years have been at the root of the problem of the public sector banks. People in Bombay have unquestionably responded to the direction from Delhi,” said Damodaran, an IAS and former banker, who has served at various government advisory panels.

Speaking at the 14th convocation of National Institute of Bank Management (NIBM) in Pune, he said that the problem which public sector banks face is peculiar with the problem of ownership.

Alluding to the recent governance issues being raked at private sector lenders such as ICICI Bank and Axis Bank, Damodaran said, “I am not for a moment arguing that we should privatize everything because we have very recent evidence that privatization is not a synonym for honesty or efficiency or avoidance of conflict of interest. The answer does not lie in privatization.”

He said the answer lies in the fact that a heterogeneous country like India needs a very strong public sector and the “ownership of the public sector banks (under current scenario) ensures us that it is not a strong public sector”.

The former markets regulator chief’s comments come amid plans of privatisation of public sector banks that the government has expressed repeatedly.

“We need a healthy public sector. (I) don’t think merit lies in privatisation but you need to fix the public sector by diagnosing the problem. There are excellent public sector (undertakings) and they are not necessarily sitting on problem. India cannot live without public sector that is performing,”

He said there was a simple difference between ownership and management. “These are entirely two different things. When you think ownership equals management…when you start looking over the shoulders of bank management to see the correctness of every transaction, when ownership translates to transactional supervision, which you are not tasked with then there is a problem of ownership.”