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Random Reflections

A farmer came to a bank and asked for a loan for cultivation. The branch manager asked for security.  The farmer said that he doesn’t have any security. The branch manager asked for the land documents, encumbrance certificate, chitta, and legal opinion and finally gave a loan. After a good harvest, the farmer came back to the bank with a bag full of money and asked the branch manager to close the loan and return the balance in the bag as he was illiterate and not good at counting. The branch manager counted and found more than a lakh left in the bank after closing the loan. Now he returned the land documents and asked the farmer to keep the balance amount in the bank as a fixed deposit. The farmer asked him, ‘What security can you give ?’ The branch manager was puzzled.

This is how banks run, they take deposits without providing any security and people deposit their money in good faith. Let us look at some figures from the State Bank of India.  to understand this.

SBI has a capital of only Rs 892 Cr and the reserves and surplus accumulated out of its profits are to the tune of Rs 2,79,196 crores. The total of its capital, reserves and surplus is only Rs.2,80,088 crores but the bank has deposits worth Rs 40,51,534 cr which is 1446% of its capital and reserves. This is what it uses for giving out loans and making a profit. All banks run with people’s money. Still, Public Sector Banks have an unwritten sovereign guarantee as they are owned by the government.

Banks and Equality 

Our Constitution’s directive principles state, ‘promote the welfare of people by securing and protecting as effectively as it may a social order in which justice, social, economic & political, shall inform all the institutions of the nation.’ The Public Sector Banks are institutions which are the arms of the State. So they promote economic justice along with social objectives directed by the State. The private sector which is for profit maximization cannot be expected to do so and they have not done that in the past or present.

In fact, after nationalisation, public banks helped in capital formation through loans, they promoted the farm sector, industry and services and thus generated employment. They contribute 7.7% of the GDP.

The purpose of nationalisation was to ensure a better regional, sectoral and functional reach of institutional credit in India and promote equality.

Did nationalisation achieve its objectives? For a detailed take, read this article.

History of Banks in India

We must learn from history when we implement new policies. Let’s have a glimpse. In the year 1947, India inherited an unwieldy banking system which was weak, entirely in the hands of private industrialists and catering to only a small section of the society.

205 banks went out of business between 1947 & 1951. The Banking Regulation Act was amended 10 times between 1950 & 1967 to bring some discipline and social control. From 567 banks in 1951, the number of banks came down to 91 in 1967 due to collapse, insolvency, acquisition and takeover. The All India Rural Credit Survey 1954 showed that banks provided only 9% of rural credit and the rest were by landlords cum money lenders. For a detailed grasp of the history of banks in India, read this article. 

Co-operatives

In the 60s cooperative societies were encouraged learning from the experience of France and other countries. Due to this, the share of rural credit went up to 20% in 1971 from 5% in 1960. They continue to play a major role by providing 15% of the total credit in the country.

Social Development Report India

As seen in the table below, India did pretty good in terms of social development, following the nationalisation of banks and other banking reforms done in the 60s.

1950 1983 2006 2014 2017
Top 10% 40% 30% 48% 55% 80,7%
Bottom 50% 19% 24% 21% 15% 2.8%

The earnings of the top 1%  of the population came down from 21% in 1940 to 6% in 1990. While the earnings of the bottom 50% grew faster.  At the same time, the expansion of bank branches helped banking reach the interiors of the country.

1969 1979 1989
No. of bank branches 8262 30202 57699
Rural 22% 44% 57%
Semi-urban 40% 26% 19%
Urban 19% 16% 13%
Metro 18% 13% 10%
Pop/Branch 64000 22000 14000
Share of priority Sector 14% 30.9% 42.6%

These were remarkable developments which continued till 1991.

Beginning of the Destruction

With the Liberalisation Privatisation and Globalisation policies adopted under the Structural Adjustment Programme dictated by IMF and World bank, the destruction started.

Committees were constituted to recommend so-called reforms starting from Narasimham Committee to the P J Nayak committee. The summary of their recommendations was-

  1. Government stake to be brought down to 33%; Merge banks; Liberal entry of foreign banks; Increase private banks; Licenses to Industrial Houses; Phase out priority sector lending and Outsource and reduce bank staff
  2. All this has been done except licences to Industrial houses which is under consideration. But they are already permitted to have Non- Banking Financial Companies.
  3. Development Finance Institutions like IDBI, ICICI, and HDFC were converted into commercial banks leading to the absence of long-term financial Institutions. Public Sector Banks were forced to give long-term loans for steel, power and infrastructure leading to huge NPAs.
  4. Corporates were given huge loans without adequate security as per RBI and Finance Ministry guidelines which lead to a further increase in NPAs.
  5. The insolvency and bankruptcy code and National Company Law Tribunals created by this Govt have led to legalised loot in the name of haircuts compelling the FM to lament about it recently.

FRDI Bill, 2017

Due to the pressure of the Financial Stability Board along with IMF and World Bank, the Union Govt introduced a bill named Financial Resolution and Deposit Insurance Bill in Parliament. The bill paved way for the appropriation of bank deposits by converting deposits into shares/bonds and absolute power for a new authority. Unions and Associations led by AIBOC and people’s movements like Financial Action Network fought against it and it was withdrawn with a caveat that it will be brought back at the appropriate time. It’s like Democle’s sword hanging on the head of depositors.

At the same time the private bank, running just with the motive of profit maximisation failed miserably to generate any growth for the country.  For a detailed understanding of how was banking in the private sector before nationalisation, read this article. 

From 2014- towards total destruction

The new Government started its privatisation plan with Gyan Sangham -A road map for reforms in January 2015. Mckinsey prepared a road map for privatization presented by Public Sector Bank chiefs. The meeting was attended by PM and FM. This was followed up every year as Gyan Sangham 2, Vichaar manthan, 1&2, Enhanced Access & Service Execution (EASE). Now Mckinsey has been substituted by Boston Consultancy Group.

At the same time, private banks are becoming foreign banks. Foreign shareholding in private banks has increased dramatically. See the data below:

  • Axis Bank – 55.6%
  • HDFC Bank – 72.1%
  • ICICI Bank – 59% 
  • IndusInd – 54%

While the private banks advertise efficiency, the public banks are the ones that are catering to the needs of the poorest in the country. Opening 97% of Jan Dhan accounts, pursuing govt schemes and giving out small credit, is possible only because of the public sector banks.

What’s happening today?

In spite of the social and financial importance of the public sector banks, the RBI and the government in recent times have created several troubles for the public banks. Let’s review some of them.

  • Since 2014 there has been no appointment of Officer Director and employee director which is mandated by law. Even high court order has been violated.
  • The banks are replacing staff with Business Correspondents – 15.9 lakhs BCs are there as per RBI and NABARD reports whereas the staff strength is 10 lakhs only. They run Customer Service Points (CSP) for a commission under a National Business Correspondent. Initially, they were for unbanked areas but now they are there even in Metros. SBI has received permission to start SBI Services Pvt ltd which is going to run the rural and semi-urban branches with BCs and contract employees which will be disastrous.
  • The population per branch ratio is 11000 only, whereas we require one per 5000 when compared with other countries. Instead of a branch in places where there is a population of 5000, now there is an ATM or CSP which are being termed as touch points.
  • The Non Performing Assets have increased due to policies which killed DFIs and corporate loans without adequate security.
  • The NCLTs were created with the help of the IBC to write off loans in the name of haircuts instead of recovery.
  • Now Bad banks are created to help more write-offs and the culprits once again get fresh loans with their political connections. This is loot of people’s money and a crisis is brewing.
  • There is no transparency in the write-offs. RBI is not willing to disclose the written-off account details of the borrowers.
  • Public banks are no longer behaving as public institutions. They are trying to copy private banks. They do not have adequate staff and they are more into cross-selling which is mis-selling.
  • Fintechs and Neo-banks without physical branches are looting people. The effect will come to the fore after a few years. It is the poor and middle class who are affected.
  • Payment Banks are becoming a failure. Some of them have closed down; small finance banks are struggling to survive.
  • Deposit insurance of Rs 5 lakhs is too low. In fact, for Public Sector Banks it is not needed. They have never claimed a penny.
  • Too many service charges on small customers are creating a bad image which needs to be reviewed.
  • Banks are promoting private companies as subsidiaries which is not ethical.
  • Nidhis are offering better interest and secured loans. If not monitored they will be looting people’s money.
  • NABARD is weakened by reducing staff and reducing branches. This will affect rural credit and cooperative banks.

What needs to be done?

  • Increase small loans throughout the country– introduce a revised Integrated Rural Development Programme(IRDP) and an Integrated Urban Development Programme(IUDP) and provide loans below Rs 5 lakhs for cottage industries, village artisans, street vendors, women traders and service providers.
  • Increases branches staff immediately. At least double them.
  • Stop outsourcing which takes away job security and social security. convert BCs into permanent employees
  • Appoint the board of directors for employees and officers who can be the watchdogs and real feedback givers.
  • Increase priority sector lending to 50% with revision in norms to help the smaller people and rural sector.
  • Strengthen District Credit Plan and Potential Linked Credit Plans.
  • Enact a law providing the Right to Credit
  • Promote development banks quickly. Not one but a few
  • Wind up NCLT and bring laws and methods for real recovery
  • Strengthen co-operatives in rural and urban areas by supporting state governments with adequate refinance and technology.
  • Lend more directly to SHGs instead of Micro Finance Institutions and start women’s banks across the country.
  • Stop mis-selling insurance, mutual fund and other products in bank branches. There can be a separate vertical if necessary.
  • Increase bank charges for the rich instead of the poor.
  • Expand Regional Rural Banks (RRBs) and stop listing them in the share market.
  • New Lead Bank Scheme should be introduced and monitored.
  • For assessing the performance of Public Sector Banks create new tools for performance
  • Bring Environment and Social Concerns mandatory for all
  • State-level banks may be started as done in Germany
  • Remove the secrecy clause and bring transparency to loans. Secrecy can be kept on deposits alone.
  • Support postal bank of India which can be a universal bank instead of payment bank.
  • Start specialised branches for agriculture, MSMEs, and SHG divisions in all bank branches.
  • Strengthen NABARD as well as SIDBI by converting them into Development Finance Institutions.
  • Nationalise private banks once again so that they cater to the development of the nation.

Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.

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