India's dilemma over banking reforms
By James MelikReporter, Business Daily, BBC World Service
In a year in which growth was at its lowest in a decade, the Indian government is trying to introduce reforms to boost Asia's third-largest economy.
Parliament has passed a bill aimed at enticing foreign investments to the banking sector, and it is expected to be passed in the upper house as it is backed by the two biggest political parties.
But much-needed economic reforms are not always welcome and opponents to the measures range from communists to right-wing nationalists.
In August, more than 10,000 bank employees held a mass meeting in Mumbai to protest against an amendment to the banking laws.
The majority of India's banks are owned by the state, and the unions say the strike was a huge success.
CH Venkatachalam, general secretary of the All India Bank Employees Association, which helped spearhead the strikes, says his union is opposed to any reform.
"The world knows that India is still a developing economy and for this development we need a lot of resources," he says.
"At the moment, in all the banks in India, we have about $13bn (£8bn) of Indian people's rupees, and we want safety for this money."
Mr Venkatachalam says people have already lost money in the many private banks whose operations have been closed down by the central bank because of mismanagement.
"We are very concerned, these banks must must be government owned," he says.
Service before profit
Mr Venkatachalam adds: "60% of the population relies on agriculture and most of it is backward, so we need money for that.
"We also need to create more jobs and for industrial development we need money, so we want the banks to be in the government sector.
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CH VenkatachalamAll India Bank EmployeesIf people can convince us that globalisation, more capital, more private sector, is a panacea for improving India's integration in the world economy, we shall consider the proposals”
"What we need is not profit, what we need is access to banking services and access to credit."
But others say if India wants to compete on a global stage, it has to open up and liberalise its financial sector.
"As of now in the global arena, the contribution of Indian banks for global trade is only 1.5%," Mr Venkatachalam says.
But he does not think liberalisation is necessary.
"What is happening in the name of liberalisation is on the terms of investors coming into the country," he says. "We can open up our financial sector, but on our terms and conditions.
"We are trying to prevent any havoc which will take place by opening up India's economy.
"US banks are capital intensive, but in India we are people's-deposits intensive.
"If our banks are in difficulty then our people will be in difficulty and we cannot afford that in India."
But he adds: "If people can convince us that globalisation, more capital, more private sector, is a panacea for improving India's integration in the world economy, we shall consider the proposals."
Addressing customer needs
Former government advisor Prof Nitin Desai, from the Indian Council for Research on International Economic Relations, says the idea that only public sector banks can serve poor households does not stand scrutiny.
"Private banks have been doing rather well and they have raised the bar on the quality of customer service, including to poor households," he says.
"The banking crisis in the US arose because of a laxity in the regulatory system.
"The government has said it will not go ahead with any new licenses until the banking laws amendment bill is passed, and that bill enhances the Royal Bank of India's powers of regulation, including the power to supersede banks.
"The idea that somehow these banking reforms mean that we will have a Western-style free-wheeling banking system is not correct."
Prof Desai says India does not want to change the banking system, but simply to open the doors for new players.
What is really required, he says, is to change things for the customers.
"They need low-cost money transfer, the government is talking of using smart cards to deliver subsidies and the banking system has to step up to this," he says.
Nationalised banks to join nationwide strike today
AURANGABAD: As part of the nationwide protest against the Banking Bill amendment announced by the government, almost all nationalised banks in the city will remain closed on Thursday. Around 1,500 bank employees will join the strike announced by the United Forum of Bank Unions (UFBU) in the city.
There are seven unions under the UFBU out of which three, namely, All India Bank Employee Associaiton (AIBEA), All India Bank Officers Association (AIBOA) and National Union of Bank Employees (NUBE).
The over five lakh employees of these three unions from across the country will participate in the protest.
Datta Aphale, joint secretary, Bank of Maharashtra (BOM) employees union, Aurangabad, said, "The strike will affect clearing transactions worth around Rs 300 crores in the city and cash transactions worth Rs 50 crores. The amendment states merging of smaller banks with major entities and reducing the number of banks. Recently, State Bank of Indore has been merged with the State Bank of India. Such policies will wash out the individual identities of the bank," he said.
He said that this move is to make the banks in India more competitive as compared to international banks. "Nationalised banks are spread in remote parts of the country and run on deposits made by the villagers, farmers and urban poor," Aphale said.
However, under the amendment, the voting rights of shareholders which were restricted between 1% and 10% in nationalised banks will be increased to 26% for private banks which will be utilised by the private and corporate sectors. Modified representatives will influence votes according to the wish of the corporates. It will lead to washing out of agriculture and the common man's interest.
"Under the commission and competition Act, permission is needed for amalgamation, merger and affiliations of different banks, although after the amendment of the bill the government need not approach the Act as the clause of permission has been removed in the amended bill. Part of the funds of national banks located in rural branches is allotted under the Rural Development Fund (RDF) stipulated for the poor and common people. The aim of RDF is to finance the priority sectors such as agriculture and its subsidiaries in rural areas." Giving control of these banks to corporate sector will hamper the economic growth in rural areas, he added.
There are seven unions under the UFBU out of which three, namely, All India Bank Employee Associaiton (AIBEA), All India Bank Officers Association (AIBOA) and National Union of Bank Employees (NUBE).
The over five lakh employees of these three unions from across the country will participate in the protest.
Datta Aphale, joint secretary, Bank of Maharashtra (BOM) employees union, Aurangabad, said, "The strike will affect clearing transactions worth around Rs 300 crores in the city and cash transactions worth Rs 50 crores. The amendment states merging of smaller banks with major entities and reducing the number of banks. Recently, State Bank of Indore has been merged with the State Bank of India. Such policies will wash out the individual identities of the bank," he said.
He said that this move is to make the banks in India more competitive as compared to international banks. "Nationalised banks are spread in remote parts of the country and run on deposits made by the villagers, farmers and urban poor," Aphale said.
However, under the amendment, the voting rights of shareholders which were restricted between 1% and 10% in nationalised banks will be increased to 26% for private banks which will be utilised by the private and corporate sectors. Modified representatives will influence votes according to the wish of the corporates. It will lead to washing out of agriculture and the common man's interest.
"Under the commission and competition Act, permission is needed for amalgamation, merger and affiliations of different banks, although after the amendment of the bill the government need not approach the Act as the clause of permission has been removed in the amended bill. Part of the funds of national banks located in rural branches is allotted under the Rural Development Fund (RDF) stipulated for the poor and common people. The aim of RDF is to finance the priority sectors such as agriculture and its subsidiaries in rural areas." Giving control of these banks to corporate sector will hamper the economic growth in rural areas, he added.
New banks may aid your savings
Your savings deposits may now fetch you more interest earnings, following the expected entry of new private banks after the passage of a banking reform bill this week. Consumers are also likely to get new products and services at lower costs as the entry of new players hots up competition in the sector.
"New banks are likely to bring higher efficiency, innovative products and new technology, which will bring down costs for customers," said Monish Shah, senior director at consulting firm Deloitte India. "Competition from new players will put pressure on existing banks to perform better which will further improve service standards for customers."
The Lok Sabha on Tuesday passed the Banking Laws (Amendment) Bill, paving the way for setting up new private banks as it strengthened the regulatory role of the Reserve Bank of India.
The RBI has now been empowered to supersede bank boards to safeguard depositors and shareholders' interests, as the RBI will be able to investigate the books of the associate enterprises of a bank.
Larsen & Toubro, Tatas, Aditya Birla group, Bajaj Finserve, Anil Dhirubhai Ambani Group (ADAG), Religare, Mahindra and Mahindra, Srei and Edelweiss are among those looking to foray into banking services.
Previous trends confirm that new banks will pursue aggressive strategies in attracting customers. When the RBI deregulated interest on saving deposits in October 2011, banks including Yes Bank and Kotak Mahindra Bank, which received licences in 2003, took the lead in hiking savings deposit rates up to 7%. Most banks in India still offer 4% interest on savings deposits.
"New entrants to the banking sector are likely to use product innovation as a differentiator to compete with existing players," said Shachindra Nath, group chief executive officer of Religare Enterprises. "Apart from attractive interest rates, one can expect new and innovative product/service bundles."
With the focus likely to be on rural and semi-urban areas, rural consumers are also likely to benefit. "Our focus will be rural and semi-urban areas," said Hemant Kanoria, chairman and MD, Srei Infrastructure Finance.
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