The economy world over has been affected which has never happened at this scale.

World Bank report of June predicted that 71 million to 100 million people will move towards extreme poverty of less than $1.90 at 2011 prices.

A detailed study of the United National covering 70 countries predicts that 490 million will move towards poverty.

The World Bank, reckons than in the past 6 months 212 countries have rolled out or made plans to rollout 1179 social protection measures that will reach 2 billion people. The focus is on food, waiver of utility bills, creation of temporary jobs, providing minimum wages to all, cash handouts and investments to create employment.

Now let’s compare with our country. India’s growth in the first quarter of 2020-21 at (-) 23.9% is one of the highest contractions globally.

The 2020-2011 GDP growth for India is projected at (-) 5.8% by RBI survey, (-) 14.8% by Goldman Sachs and (-) 10.2% by OECD.

We anticipated that agriculture and public expenditure will help to restore the economy. But reports say that public administration, defence and other services contracted at (-) 10.3%. Independent estimates show that state’s capital expenditure, fell by 43.5%. Demand for NREGA work went up by 73% in July and 66% in August(yoy)

Centre’s Gross tax revenues contracted by (-)32.6% and CAG based data pertaining to 19 states show a contraction of (-)45% in tax revenues.

India has one of the lowest fiscal stimulus and a study by ‘the Economist’, India is one of the country which is going to send 20% of the population to poverty in addition to what exists. Even the neo liberal economists like Dr. C. Rengarajan are suggesting to government to borrow more through RBI and save the economy.

Instead the government keeps giving false claims and is entirely depending on banks to save the economy. Banking performance is always the mirror of the economy. If the economy is not doing well banks can’t do better. Especially when the social goals are given up and profit is the only criteria.

Is it not a shame to say that demand of priority sector has gone down by 1.8%. There are crores of priority sector loan applicants who are just ignored by the banks because the banks are asked only to support existing big borrowers who were doing well before March 2020.

Reports say that the deposit growth is still stable at 11% as people don’t find viable alternatives as more and more failures of NBFCs and societies (Sahara group) are reported.

But the credit growth is less by 5.9% in July (YoY) and 5.5% in August (YoY). This clearly shows that banks are lending the deposits which they are supposed to lend.  Rather they invest the money in safe securities, which is not real banking.

Then, you can’t blame them. Banking sector is the mirror reflection of the economy.

Now Raghuram Rajan and Viral Acharya have come up with a 35 pages report, “Indian Banks- A Time to Reform”. As usual newspapers are lauding them because they depend on huge advertisements of banks and government and managements and banks want it. 

Are they really great economists whose advice is to be followed? Certainly not. I have been critical of Rajan when he brought in Asset Quality review at a wrong time when the economy was on down slide. He should be blamed for the increase in NPA just by accounting norms without fixing responsibility on anybody including RBI executives and staff doing audits of banks. Viral Acharya has been all along supporter of privatisation. Both belong to the same school of thoughts- Chicago School of thoughts or Milton Friedman School of thoughts which has not succeeded anywhere. They are presenting the same which they tried and failed.  You may ask, why then they left? This government could not get along with anyone whom they brought as their master’s voice. Urjit Patel, Aravind Subramaniam, Aravind Panagraia, to name a few. That’s their inherent weakness.

Now look at the solutions they give.

  • Increased growth in credit leads to growth followed quickly by busts. (So go slow?)
  • Increase presence of Non-Banking Finance Companies, Micro Finance and FinTech’s. (Higher interest for poor borrowers)
  • Out of court restructuring framework for bad loans
  • Holding company structure for government bank, less than 50% share and make them government linked instead of government owned.
  • Payment to government banks for achieving goals fixed by government.
  • Winding up Dept. of Financial Services
  • Incentivise structure of management.

What will happen?

  • Slowdown in credit growth will affect the banks as well as economy.
  • NBFCs will squeeze the small borrowers and flourish. They are the new generation money lenders.
  • Out of court settlement will lead to more corruption.
  • Reducing the share through Banking Investment Company (BIC) will lead to the shareholders taking over as is happening in Lakshmi Vilas Bank and Dhana Lakshmi Bank. The difference is it will be Ambani’s who have the capacity prescribed by Rajan and Acharya.
  • Government should pay for the expenditure on Jandhan, Mudra etc.  That’s welcome.
  • Winding up DFS will be throwing the baby with the bath water.
  • Incentive structure always leads to Yes men, corruption and  pleasing the bosses.

The final nail in the coffin is their demand for re-privatisation through automatic dilution.

Let them stay in America. They have not understood India or Indian banking needs.

What is actually needed is

  • Transparent Banks with accountability, with stake holders participation in Boards. The fact is that it is not the government which really owns the banks, it is depositors who have much more stake than the government and the employees.
  • Double the lending – to the small borrowers – rural people at cheaper rates than NBFCs. Prof. M S Sriram, IIM has suggested quota for Nano enterprises.
  • Become real partner in progress, Identify, Help, handhold, mentor borrowers – which is done in Israel, China, Germany etc.
  • Make Banking affordable for poor, reduce Bank charges, minimum balance, cheaper loans and reasonable interest on deposits.
  • Assure that there will be no moratorium on deposits.  We will not allow Banks to fail.  Banks will pay you – the Govt must do it better than anyone else.
  • The Govt has to spend and also support banks in all possible ways.

If there is a Will there is a Way.

Thomas Franco is former General Secretary of All India Bank Officers’ Confederation.

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