Indian Banking Paradox: Accounting Profit Vs Social Profit

We are in the midst of major changing times in recent history; internationally, domestically in general and the Indian banking system in particular.

First time after independence, Indian banks are being sold to foreign capital, Lakshmi Vilas to DBS and Yes Bank to Sumitomo. IDBI bank is next. Few public sector banks are likely to be considered, first for selling to domestic private capital, and then probably to foreign capital in future. This may unfold very gradually but direction is irreversible.

Demand for dominance of public ownership in the banking sector is non-negotiable. However, we have entered into an era where the distinction between Public Sector Banks (henceforth PSBs) and Private Sector Banks (henceforth PVBs) is consciously being erased.

There was a period when PSBs were being asked not to chase accounting profits alone but also engage in social banking, when PVBs were exclusively and excessively concerned about accounting profits.

However, with the listing of PSBs on stock markets, the frame of reference fundamentally changed. The parameters for assessing performance of PSBs, were recast and made on par with those of PVBs. Ministry of Finance, readily grabbed an alibi for not directing the PSBs to undertake social banking etc.

Now, accounting profits became the sole criteria for assessing performance parameters of even PSBs. They are evaluated and compared with their counterparts in the private sector for net profit, earning per share, PE multiple, market price and market capitalization. All downstream derivatives of accounting profits. The objective of this change in performance parameters is to present the pack of PSBs attractive to the financial investors.

This is certainly worrisome. It may happen that political leadership might retain 51 percent ownership of PSBs, but compel them to operate like PVBs. What will be left in PSBs, if they are deprived of their “publicness”.

When I ask myself from where the political leaders and policy makers have been gathering political courage to push this agenda ? Their strength comes from conducive ideological foundations laid down by neoliberalism, through their narrative settings, spanning over the period of the last three decades. What needs to be noted is that these neoliberalism narratives also have considerable traction among professionals from banking industry and capital markets, bureaucrats, university professors and media persons and even certain sections of English language speaking common citizens. This compels us to study and analyse these neoliberal narratives.

I believe countering the above mentioned neoliberal narratives, which has shaped and is still shaping the Indian banking industries is an important task. This task will involve deemphasizing excessive importance on accounting profits and reemphasizing the importance of social profits in the public discourse, particularly in a poor and developing country like India.

Understanding Neoliberalism Narratives.

In the last few decades, Neoliberalism has seeded quite a few narratives all over the world, which has shaped economic thoughts not only of policy makers as also opinion makers and common citizens. I have chosen only five of them which I feel are relevant to today’s theme of Panel Discussions.

1. Ring Fenced Entity: An enterprise, including a bank, exists as a Ring Fenced entity and need not be bothered or burdened about what happens outside that “ring”, including externalities, positive as well as negative, emanated from its own decision making.
2. Handful of stakeholders: The relevant literature does use the term multi-stakeholder of an enterprise. Ideally the stakeholders of a bank shall include investors, depositors, borrowers, from different strata of the society, employees and officers, state, Central Bank, nation, society at large and even environment. It needs to be noted that the depositors and borrowers of a bank are not homogeneous, many of them belonging to vulnerable sections of society and financially illiterate. This demands differentiated, “soft glove” treatment to this set of stakeholders. However, in practice, the term stakeholders have been confined only to investors in equity and debt.
3. Maximization of wealth of only one stakeholder that is “shareholders”: The single most important guideline which emerged, while running all corporate enterprises, cutting across all the sectors, including Banking, was “all decisions of managers shall be aimed at “maximization of shareholders wealth”
4. Establishing one to one equation of Accounting Profit and Efficiency: Any enterprise making accounting profit is proof that it is being run efficiently; the manpower deployed is productive and disciplined etc. Not only that. Higher the accounting profit means higher efficiency. As the corollary goes, all enterprises making accounting loss is badmouthed as inefficient, the manpower being lazy etc. if an enterprise incurs accounting loss, years after years, it was concluded that it is worth privatizing it or shutting down. “Why to throw good money to cover up inefficiencies and laziness, and for how many years” as the adage goes. The latter is routinely weaponised to privatize and even shutdown public sector undertakings in multiple sectors.
5. Generally Accepted Accounting Principles(GAAP) and Indian Accounting Standards(IAS): All the above narratives or guiding principles have been codified in legally enforceable GAAP and IAS. It may be noted that these codes have been authored by Indian Chartered Accountants Institution, a statutory organisation set up under an act of parliament and recognised as Self Regulatory Organisation for the accounting industry, by the Central Bank.

Two Accounting Principles, relevant for today’s theme are, are

(a) Monetary Unit Principle, which states that ”all business transactions recorded in the financial statements must be in the form of money”; and further that “only those transactions that you can express in monetary terms” shall be taken into account; and further that “you may record non monetary transactions separately”.

(b) The Cost Principle, which states that “only those costs to be recorded that involved an actual outflow of funds”

These codes, read along with the Ring Fenced Entity concept, makes it clear that whenever society, economy or nation, which exist outside the Ring, gains or pays heavy costs for the business decisions of those sitting inside the “Ring” will not be taken into account. This also means, all positive or negative externalities, will not enter accounting statements of an enterprise and will not be taken into account while arriving at accounting profits.

Building Blocks for Counter Narratives

Having brought on table a set of five relevant narratives laid down by Neoliberalism, I am attempting some building blocks on which one can build counter narratives. This, I feel will ideologically equip all of us, who are emphasizing the need to factor in social profits along with accounting profits.

Highly Socialized Enterprise.

Philosophically, each enterprise, producing goods and services, irrespective of its size, sector in which it operates and its form of ownership is a “social enterprise”. What matters for today’s theme is the degree of socialization.

Whenever an enterprise uses or dis-uses huge quantities of social, human, natural, financial and collective resources, with adequate or inadequate or without any compensation; whenever an enterprise impacts, intentionally or unintentionally, a very large population and social units, can be called a highly socialized enterprise. Whenever such a highly socialized enterprise operates, it generates considerable quantities of social costs and gains, irrespective of whether such costs and gains are factored in the financial statements of that enterprise.

The banking industry is one such highly socialized industry.

Collective Prosperity

Not only India but almost all countries in the world are witnessing acute economic disparity. The narrative and guiding principles, mentioned above and many more, set by Neoliberalism have largely contributed to this economic disparity. In order to counter this, there is a need to develop and propagate the theory of “collective prosperity”.

Banking Sector as an anchor for Nation’s Economic Sovereignty

Any upheavals in the international economy, trade, capital flows or geo-political relationships, first hits the banking (and financial sector in general) of that nation. On the other hand, on account of its unique strengths of manufacturing credit and ability to direct credit, Banking Industry can also be an anchor in stabilizing national economy in the period of such upheavals. Any nation’s political sovereignty can sustain only when backed by self driven economic institutions, such as the Banking sector. Needless to add, we have already entered into an era of international uncertainties.

Generally Accepted “Social”Accounting Principles (GASPP)

Parallelly, work has to be undertaken to build on and refine already existing theoretical work of Social Cost Benefit Analysis, with specific focus on the Banking sector.

Monetization of Social Profits

For any enterprise, including Banks, accrual of adequate cash is a must. It is like blood in a healthy human body. What it implies for the present theme is, giving some notional credit points for the social profits generated by a bank, will remain a paper proposition. There is a need to work on the proposals on monetization of such social profits, and more importantly, which agency will pay for such social profits accrued to the society. The obvious choice being the State, which, in every sense, is a custodian of societal interests.

The clincher to make counter narratives as a force to reckon with, will only be coming from the people centric political forces. There is no substitute or shortcut to the ongoing efforts to strengthen the existing political platforms, including trade unions in the banking industry, who do not subscribe to the “supremacy of capital” ideology and do subscribe to the “people over profit” ideology.

There is no dichotomy in intellectual work and political mobilization. Setting time aligned analysis and narratives, which can capture the minds and imagination of millions, facilitates political mobilization. These are like two legs. We have to walk on two legs. So let there be more such brainstorming events in future.

(This is a slightly edited version of the presentation made at the panel discussion at the Centenary Year Celebrations of Com P K Menon Organized by Maharashtra State Bank Employees Federation / AIBEA In Pune on September 27, 2025)

Sanjeev Chandorkar is a former banker and former Associate Professor at the Tata Institute of Social Sciences, Mumbai.

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