Reversing Bank Nationalisation
Prakash Karat 27th of December 2012
THE passage of the Banking Laws (Amendment) Bill in the winter session of Parliament marks a turning point. The Manmohan Singh government has undone what the Indira Gandhi government did. The Bank Nationalisation Act nationalized all the major private banks in 1969. Many of these banks were linked to industrial houses. The 2012 amendment to the banking laws paves the way for the entry of corporate houses into banking. Thus the wheel has turned full circle.
The Manmohan Singh government has effected this retrograde step after repeated efforts since 2005. During the first term of the UPA government, this move could not succeed because of the firm opposition of the Left parties.
The Banking Laws (Amendment) Bill sought to achieve two goals. Firstly, the Bill, as originally drafted, wanted to do away with 10 per cent cap on voting rights for the shareholders. This was necessary as the NDA government in January 2004 had notified that 75 per cent FDI would be allowed in Indian private banks. The Prime Minister Manmohan Singh reaffirmed this commitment. Since the existing law provided for only 10 per cent voting rights, it was an obstacle to a foreign bank investing in a 74 per cent stake and not getting commensurate voting rights. It was in order to facilitate foreign banks taking over Indian private banks that the Bill proposed to do away with the cap on voting rights.
The government argued that there are several weak private sector banks and investment of foreign capital would help to revive the banks. The Left parties had, at that time, countered this and asked the government to identify the banks which are weak and public sector banks should be encouraged to acquire them.
The Banking Regulation (Amendment) Bill of 2005 lapsed since the 14th Lok Sabha was dissolved in 2009.
The government introduced the Bill again in 2011 in the 15th Lok Sabha. The Standing Committee on Finance chaired by the BJP MP Yashwant Sinha recommended that the voting cap can be raised from 10 per cent to 26 per cent instead of just removing the cap altogether. The government accepted this recommendation. With the passage of the Bill, foreign banks and foreign financial institutions can acquire control with 26 per cent voting right and by adopting various devises.
The other aspect of the Bill adopted is that it enables new banks to be set-up in the private sector. The Reserve Bank of India has been empowered to license and regulate such banks. There will be no bar oncorporate houses opening banks. Prior to nationalization in 1969, most of the private banks were linked to industrial houses – United Commercial Bank to Birla firms, the Oriental Bank of Commerce to Thapar companies, the Central Bank of India to the Tatas. Banks controlled by industrial houses used the public deposits for their own purposes and excluded the farmers and small enterprises from access to finance.
One of the main objectives of bank nationalization was to break the unholy nexus between big business houses and banks since it seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries. It is after nationalization that the public sector banks developed the banking network and provided agricultural credit and evolved priority sector lending. There are over 65,000 branches of public sector banks. The branches in rural areas which were 58 per cent of the total in 1991 declined steadily after liberalization and was 40.8 per cent in March 2011.
The Reserve Bank of India had resisted the neo-liberal arguments of the Manmohan Singh government and was visibly reluctant to endorse the entry of new private sector banks including those sponsored by corporates. Even after the NDA government’s announcement to allow FDI in banking up to 74 per cent, the Reserve Bank of India was of the view that, “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses….Diversified ownership becomes a necessary postulate so as to provide balancing stakes.” (Chapter VIII of RBI’s Report on Trend and Progress in Banking in India, 2003-04).
P. Chidambaram, as the Finance Minister in the first tenure of UPA government and subsequently in the second tenure, has done everything to push for the neo-liberal reforms in banking. Faced with the reluctance of the RBI, the Finance Minister declared that the RBI would oversee and have a final say on the opening of new private sector banks. He sought to neutralize the RBI reservation by decreeing that the Bank would be the sole arbiter and regulator of the banks. The RBI subsequently brought out draft guidelines for the opening of new banks. A number of corporate houses like Reliance Industries, Aditya Birla Group, Mahindra & Mahindra, Tatas and Larsen & Toubro have expressed interest in opening banks in August 2011. With the passage of the Bill, it will be a matter of time before new private sector banks enter the fray, many of them set-up by the corporates.
After the global financial crisis in 2008, when several banks and financial firms collapsed in the US and Europe, the Indian banking system was unshaken. The main reason for this was the failure of the Manmohan Singh government to push through financial sector liberalization. Its move to allow foreign banks to take over Indian banks was stalled by the Left.
This did not, however, stop the Congress party from claiming credit for the Indian banking systemwithstanding the financial crisis in the Congress party’s Election Manifesto for the Lok Sabha elections of 2009. The UPA government’s success in weathering the financial crisis was attributed to “government ownership of banks that is the legacy of Indira Gandhi”. Today, the Congress party is undermining this legacy.
The Left parties pressed certain amendments and voted against the Bills. Only the AIADMK, the TDP, and the BJD MPs voted along with the Left in the two houses. The Congress-led government was able to get the Bill passed because of the support of the BJP. This, once again, underlines the fact that when it comes to serving the interests of big business in India and international finance, there is no difference between the two parties. Both are willing agents and advocates of neo-liberal reforms. The only concession that the BJP got from the government was the dropping of the dangerous clause permitting banks to participate in forward trading of commodities.
The UPA government is pushing ahead with banking reforms which means more privatization and financialisation of the banking system. In the last two decades, the RBI has licensed 12 banks in the private sector – ten banks in 1993 and two later. Increase in private sector banks, privatization of equity in public sector banks, shift in banking practices away from developmental and social needs are the hallmark of the neo-liberal reforms. The American pattern of “innovative financing” through different kind of derivatives, including credit derivatives, have been introduced in the banking system.
In short, every practice in banking which led to the financial crisis and instability in 2008 in the West is being introduced in India in the name of financial sector liberalization. The push for financial sector liberalization is at the heart of the neo-liberal reforms. This is meant to align the banking and financial institutions of the country with the needs of the international finance capital.
With the opening of multi-brand retail to FDI, the move to increase the FDI in the insurance sector to 49 per cent and privatization of pension funds, the Manmohan Singh government is well and truly acting as a servitor for international finance capital and big business. The Left parties and the working class movement have to gear up to counter this offensive with greater vigor. The strike conducted by the bank employees against the passage of the Banking Laws (Amendment) Bill should be followed up with wider struggles. The two-day general strike on February 20 and 21 should be a powerful protest against these policies which are undermining the people’s interests and handing over the resources of the country to foreign finance capital.
The Manmohan Singh government has effected this retrograde step after repeated efforts since 2005. During the first term of the UPA government, this move could not succeed because of the firm opposition of the Left parties.
The Banking Laws (Amendment) Bill sought to achieve two goals. Firstly, the Bill, as originally drafted, wanted to do away with 10 per cent cap on voting rights for the shareholders. This was necessary as the NDA government in January 2004 had notified that 75 per cent FDI would be allowed in Indian private banks. The Prime Minister Manmohan Singh reaffirmed this commitment. Since the existing law provided for only 10 per cent voting rights, it was an obstacle to a foreign bank investing in a 74 per cent stake and not getting commensurate voting rights. It was in order to facilitate foreign banks taking over Indian private banks that the Bill proposed to do away with the cap on voting rights.
The government argued that there are several weak private sector banks and investment of foreign capital would help to revive the banks. The Left parties had, at that time, countered this and asked the government to identify the banks which are weak and public sector banks should be encouraged to acquire them.
The Banking Regulation (Amendment) Bill of 2005 lapsed since the 14th Lok Sabha was dissolved in 2009.
The government introduced the Bill again in 2011 in the 15th Lok Sabha. The Standing Committee on Finance chaired by the BJP MP Yashwant Sinha recommended that the voting cap can be raised from 10 per cent to 26 per cent instead of just removing the cap altogether. The government accepted this recommendation. With the passage of the Bill, foreign banks and foreign financial institutions can acquire control with 26 per cent voting right and by adopting various devises.
The other aspect of the Bill adopted is that it enables new banks to be set-up in the private sector. The Reserve Bank of India has been empowered to license and regulate such banks. There will be no bar oncorporate houses opening banks. Prior to nationalization in 1969, most of the private banks were linked to industrial houses – United Commercial Bank to Birla firms, the Oriental Bank of Commerce to Thapar companies, the Central Bank of India to the Tatas. Banks controlled by industrial houses used the public deposits for their own purposes and excluded the farmers and small enterprises from access to finance.
One of the main objectives of bank nationalization was to break the unholy nexus between big business houses and banks since it seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries. It is after nationalization that the public sector banks developed the banking network and provided agricultural credit and evolved priority sector lending. There are over 65,000 branches of public sector banks. The branches in rural areas which were 58 per cent of the total in 1991 declined steadily after liberalization and was 40.8 per cent in March 2011.
The Reserve Bank of India had resisted the neo-liberal arguments of the Manmohan Singh government and was visibly reluctant to endorse the entry of new private sector banks including those sponsored by corporates. Even after the NDA government’s announcement to allow FDI in banking up to 74 per cent, the Reserve Bank of India was of the view that, “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses….Diversified ownership becomes a necessary postulate so as to provide balancing stakes.” (Chapter VIII of RBI’s Report on Trend and Progress in Banking in India, 2003-04).
P. Chidambaram, as the Finance Minister in the first tenure of UPA government and subsequently in the second tenure, has done everything to push for the neo-liberal reforms in banking. Faced with the reluctance of the RBI, the Finance Minister declared that the RBI would oversee and have a final say on the opening of new private sector banks. He sought to neutralize the RBI reservation by decreeing that the Bank would be the sole arbiter and regulator of the banks. The RBI subsequently brought out draft guidelines for the opening of new banks. A number of corporate houses like Reliance Industries, Aditya Birla Group, Mahindra & Mahindra, Tatas and Larsen & Toubro have expressed interest in opening banks in August 2011. With the passage of the Bill, it will be a matter of time before new private sector banks enter the fray, many of them set-up by the corporates.
After the global financial crisis in 2008, when several banks and financial firms collapsed in the US and Europe, the Indian banking system was unshaken. The main reason for this was the failure of the Manmohan Singh government to push through financial sector liberalization. Its move to allow foreign banks to take over Indian banks was stalled by the Left.
This did not, however, stop the Congress party from claiming credit for the Indian banking systemwithstanding the financial crisis in the Congress party’s Election Manifesto for the Lok Sabha elections of 2009. The UPA government’s success in weathering the financial crisis was attributed to “government ownership of banks that is the legacy of Indira Gandhi”. Today, the Congress party is undermining this legacy.
The Left parties pressed certain amendments and voted against the Bills. Only the AIADMK, the TDP, and the BJD MPs voted along with the Left in the two houses. The Congress-led government was able to get the Bill passed because of the support of the BJP. This, once again, underlines the fact that when it comes to serving the interests of big business in India and international finance, there is no difference between the two parties. Both are willing agents and advocates of neo-liberal reforms. The only concession that the BJP got from the government was the dropping of the dangerous clause permitting banks to participate in forward trading of commodities.
The UPA government is pushing ahead with banking reforms which means more privatization and financialisation of the banking system. In the last two decades, the RBI has licensed 12 banks in the private sector – ten banks in 1993 and two later. Increase in private sector banks, privatization of equity in public sector banks, shift in banking practices away from developmental and social needs are the hallmark of the neo-liberal reforms. The American pattern of “innovative financing” through different kind of derivatives, including credit derivatives, have been introduced in the banking system.
In short, every practice in banking which led to the financial crisis and instability in 2008 in the West is being introduced in India in the name of financial sector liberalization. The push for financial sector liberalization is at the heart of the neo-liberal reforms. This is meant to align the banking and financial institutions of the country with the needs of the international finance capital.
With the opening of multi-brand retail to FDI, the move to increase the FDI in the insurance sector to 49 per cent and privatization of pension funds, the Manmohan Singh government is well and truly acting as a servitor for international finance capital and big business. The Left parties and the working class movement have to gear up to counter this offensive with greater vigor. The strike conducted by the bank employees against the passage of the Banking Laws (Amendment) Bill should be followed up with wider struggles. The two-day general strike on February 20 and 21 should be a powerful protest against these policies which are undermining the people’s interests and handing over the resources of the country to foreign finance capital.
| Is Chidambaram's plan to create big banks feasible? | ||||||||||||||||||||||||||||||||||||||||||||||||
| Consolidation will help banks derive economies of scale, but integration will not be easy( Collected from newspaper 'Business Standard' | ||||||||||||||||||||||||||||||||||||||||||||||||
| Vrishti Beniwal / New Delhi December 28, 2012, 0:20 IST Finance Minister P Chidambaram wants to see at least two to three Indian banks among the world’s largest. His best bet is state-owned State Bank of India (SBI). Its assets (along with those of its five associate banks) are worth $355 billion but that’s nowhere close to the top lenders. SBI was ranked 60th in the list of world’s top 1,000 banks by The Banker magazine in July. Bank of America, which topped the list, had assets of $2.16 trillion. It might take SBI several years to reach that size organically, and by the time it does so Bank of America will have grown even bigger. Chidambaram’s plan is to take a shortcut: He wants to merge some small banks into bigger ones. It’s more than megalomania at work here. Bigger banks can offer bigger loans and derive efficiencies of scale in operations. A bigger network helps in deposit mobilisation and meeting priority-sector lending guidelines better. Smaller banks struggle to meet capital-adequacy norms and face perennial talent crunch. The general wisdom, in spite of the crash of Lehman Brothers and others in the West, is that large banks are too big to fail. This is not for the first time the government has pushed for bank consolidation. The talks first started in the early ’90s when Narasimham Committee-I said in its report on improving efficiency and productivity of financial institutions that three to four big banks, led by SBI, should be developed as international banks, followed by national banks with a countrywide presence and then local and rural banks. Narasimhan Committee-II, in its 1998 report, also stressed consolidation. Now that Parliament has passed amendments to the banking law, paving the way for the Reserve Bank of India (RBI) to issue new bank licences, consolidation in the sector is inevitable. Banking saw about a dozen mergers between 1990 and 2000, and 15 more amalgamations in the past decade. While mergers of banks with weak financials dominated the ’90s, the next decade saw coming together of healthy banks, driven by commercial reasons. The acquisition of Centurion Bank of Punjab by HDFC Bank in 2008 for Rs 9,510 crore was the biggest merger in Indian banking history. However, none of those was big enough to take Indian banks into the global league. “Not one of our banks is among the top 20 of the world. China has three. Today, if a loan size is, say, Rs 6,000 crore, there is not a single bank which can take the portfolio on its book. It has to put together a consortium,” Chidambaram recently told Parliament while trying to sell his idea on consolidation. India has both public-sector and private banks. The finance ministry, on its part, can drive consolidation in the public sector. In December 2009, the finance ministry had called chiefs of five leading public sector banks — Punjab National Bank, Canara Bank, Union Bank of India, Bank of Baroda and Bank of India — to take their views on consolidation. But the banks could not come up with a concrete plan and owing to stiff resistance from small banks, the idea was dropped. In fact, then-finance minister Pranab Mukherjee said the government would not force any merger and the proposal would have to come from the banks themselves. Now that the consolidation buzz has restarted and has the blessings of Chidambaram, the finance ministry has begun to move fast. It is learnt to have called the chiefs of a few large banks to discuss the issue. Though the government has not formally given any road map to the banks for a merger, it has created an enabling environment for the marriage of some small banks with large ones. Stumbling blocks The two biggest challenges it can face in its endeavour are technology and human resources management. Bank employees and their unions fear there might be cultural issues when two banks are brought together and overlapping branches would have to be closed down, leading to large-scale job losses. Employees of small banks fear they might not be treated favourably under the new management and could be asked to take transfers or forgo promotions. Though salaries and perks among state-run banks have seen some harmonisation over the past few years, some variations can still be found among different banks. Finding the right job for top management of small banks in the merged entity is also an issue. “Consolidation will affect the nation, customers as well as bank employees. They are talking about benefit of scale but two plus two is not four always. Experience has shown globally mergers have led to rationalisation of branches and staff,” says C H Venkatachalam, general secretary of the All India Bank Employees Association. The opposition of unions, some bankers say, might not be a huge stumbling block in the way of bank consolidation in the present environment. Unions no more exercise the kind of influence they used to in the past. In fact, merger of two of SBI’s associates — State Bank of Saurashtra and State Bank of Indore — into the parent was more or less seamless. The remaining five subsidiaries — State Bank of Hyderabad, State Bank of Mysore, State Bank of Bikaner & Jaipur, State Bank of Patiala and State Bank of Travancore — would also be merged into SBI gradually. So far, as technology is concerned, the Department of Financial Services has taken care of the issue. It has divided banks into seven groups based on the core banking solution (CBS) platform (see table). CBS networks all the bank branches and allows customers to bank from anywhere regardless of where he maintains his account. Each group here has a large bank as the coordinator of two or three small banks. They will meet on a regular basis and share their collective wisdom on issues such as human resources, e-governance, internal audit, and fraud detection and recovery, among other things. Efforts have been made to reach standardisation among banks at various levels. So, if banks in the same group have to be merged it should not be a problem. A bank executive says people from their coordinator bank have started visiting their head office to ensure there is uniformity in the practices followed by the banks in the group. “The government’s hidden agenda to facilitate mergers through this move is not ruled out,” rues Venkatachalam. A third deterrent could be the Competition Commission of India (CCI), which has been given the powers to look at all banking mergers and acquisitions. Perhaps this could be the reason why Chidambaram wanted to keep banking mergers and acquisitions out of the purview of the competition watchdog, but had to relent before the Opposition. Changing landscape “Bringing mergers and acquisitions under CCI could be counter-productive, if such consolidation is seen as creating a monopoly,” points out Jyoti Prakash Gadia, managing director of Resurgent India, an investment bank. Experts believe mergers are needed not just for achieving economies of scale but also for survival of small banks, which would find it increasingly difficult to survive with the entry of new private banks once RBI issues more licences and intensifies competition in the sector. Ramnath Pradeep, former chairman of Corporation Bank, says small banks are losing business because not many people are interested in dealing with them and increasingly want to go with large banks which can provide wider reach, better connectivity and convenient banking. But to make Indian banks really global, mergers of large banks like SBI and Bank of India are required, he says. According to the seven groups made by the finance ministry, besides SBI subsidiaries, other small state-run banks that could be subsumed into bigger banks include Punjab & Sind Bank, Dena Bank, United Bank of India, Bank of Maharashtra, Andhra Bank, Vijaya Bank, Corporation Bank, Indian Bank, Allahabad Bank, UCO Bank, Oriental Bank of Commerce, Syndicate Bank, IDBI Bank and Indian Overseas Bank. Among private banks, old-generation lenders such as Federal Bank, South Indian Bank, Lakshmi Vilas Bank, Karnataka Bank, Dhanlaxmi Bank and Karur Vysya Bank could be potential targets for large government banks as well as new private banks. “Old private sector banks don’t have deep pockets. But the larger reason why they could be acquired is that after the enactment of the new banking law their valuations would go up. This would be the right time for them to sell,” says Ashvin Parekh, partner, Ernst & Young. Notwithstanding all these issues, bankers agree consolidation is inevitable. At the moment, the finance ministry may not force banks to consolidate, as politically, it may backfire, but sooner or later market forces will compel small banks to come together with large banks. This is what happened in the ’90s and this is how many of the global amalgamations have happened.
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