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Burdened with the ever-increasing non-performing assets (NPAs) and saddled with its provisioning, it is common knowledge now that Public Sector Banks (PSBs) have suffered enormous losses and thus, are in a crisis. The current banking crisis and its ‘so-called’ solutions — be it the emphasis on privatisation or disinvestment — are both linked with the general direction that our economy is taking towards neo-liberalisation. It is often said that the PSBs have not been successful because they are not making enough profits. However, PSBs are not just financial institutions. They have a broader mandate. Neither should they be aimed at only profit-maximisation, nor should their performance be judged solely based on that. Thus emerges the need for comprehensive banking policy.

A comprehensive banking policy needs to look at both the policies that govern the internal functioning of banks (such as the Human Resource policies) and the ones that encompass the external stakeholders who are impacted by the banks (like social and environmental due diligence while giving loan to a project).

This banking policy should be designed to cater to the need of our nation and its citizens. As India is a vast and diverse country, so are our needs from banking policies. There are four areas which need to be added to the banking policy to make it more comprehensive. These are a) Responsible Banking, b) Social and Environmental Safeguards, c) Transparency and Accountability, and d) Depositors’ Rights.

The term Responsible Banking could have a different meaning for different people and in different contexts. Here, Responsible Banking means that banks and other financial institutions should operate on the basis of the values driven by upholding human rights and social and environmental responsibility.

On one hand, social responsibility means that a chunk of credit is given to selected sectors of the economy (such as farming, and small and medium enterprises) and certain classes of society, especially the poor and rural people who have difficulty in arranging collateral. For example, direct lending in priority sector comes under social responsibility. Here, Public Sector Banks have historically played a significant role in achieving 40% priority sector lending and in taking the bank branches to rural and remote areas, thus increasing financial inclusion.

On the other hand, social responsibility also means that banks’ investments do not cause social upheavals. For this, banks should not invest in projects with large social and environmental ramifications. And in exceptional cases when they have to, they should ensure that mitigation measures are taken in full earnest. This means that banks should have mandatory policies and guidelines to ensure that they do not invest or finance those projects which forcibly displace people without any rehabilitation or deprive them of their livelihood, pollute their life-sustaining resources like air and water, or threaten their environments. It also means that the banks do not invest in the firms which are involved in human rights abuses. Likewise, they should not invest in weapons, tobacco and other similar sectors. In this way, Social and Environmental Safeguards also become an essential part of Responsible Banking.

Responsible Banking also means that due diligence is undertaken before giving out loans to check if the borrower has the capability to return it. If this was done, and if there was no political interference, probably, NPAs would not have become so huge. Due diligence is also required to check if the costs – both the monetary costs as well as social & environmental costs – outweigh the benefits.

Next aspect is Transparency and Accountability. This means that banks should be transparent about where they are investing the depositors’ money. This is important because what banks invest or lend is essentially peoples’ money and not banks’ money. Transparency at all levels ensures that there are inherent checks and balances on abuse of power and corruption. As the saying goes, sunlight is the best disinfectant.

Accountability would also mean that it should be laid out as to who within the bank can be held accountable for any “irresponsible decision.” The people only get to know about the bad loans when the water has gone above their heads. Transparency and accountability will also help them to know about these loans much earlier and force banks to take corrective steps.

Transparency also promotes depositors’ rights. It opens up avenues for citizens to engage, thus, ensuring that the banks adhere to policies. Depositors are not just sources of revenue; they should have a say in how their money is being invested. They should be able to protest if their money is being invested in sectors which they feel are unethical (e.g. bombs, tobacco etc) and take an informed decision on choosing a bank of their choice according to its investment. For instance, if as a depositor one knows that Bank A is investing in cluster bombs, then one may choose not to open her/his account in a bank which invests in instruments of killing people.

However, just having a policy does not help. This can be seen in the cases of World Bank, ADB, and other multilateral banks, which have policies on paper, but their implementation is bleak.

Yet, policies are a starting point.

When one doesn’t even have policies, one cannot violate anything. Policies help an ordinary person to know the rights and obligations of both the parties and in that way it empowers them to take positions against violations, if any. Policies will help banks in becoming more transparent and assist citizens in holding banks accountable.

Policies are not hurdles in the way of banks’ operations – they are good business too.

Banking policy is not just the issue of bank employees but of every citizen who is concerned about the economy of this country. Attempts to make reforms at banks, to make banks and their operations transparent and accountable, and to avoid making unethical investments will go a long way in bringing the people together to save the Public Sector Banks from going down.

* This is an updated version of the speech made at the National Seminar on Indian Banking: Present Day Challenges and Alternatives for the Future.

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