In this 3-part report, we take a stock of the current situation of the Indian financial sector, the current financial policies, and try to map how our ‘common wealth’ is being suctioned off into the pockets of a few big business families of the country. Tathagata Sengupta writes.
Part One: Indian Banking Reforms, from the 1960s to Now
The Indian economy, in particular its financial (banking) sector, is undergoing tremendous shifts. On the one hand, the showman Prime Minister’s newest ‘dream’ – that of a ‘5 trillion dollar economy’ – is being used as a bromide to hide the potentially disastrous consequences of historic moves such as the mergers of major public sector banks and the record-breaking corporate tax cuts. On the other hand, the consumption-driven economy is witnessing a slump, industrial production is crumbling, unemployment numbers are at a 45-year high, and Indian society is witnessing unprecedented levels of social and economic inequality.
While bankrupt corporations are constantly being bailed out, poor and middle-income people are being thrust into a financial crisis. The latest example of this is the recent sealing of the Punjab and Maharashtra Cooperative Bank (PMC Bank) finances by the Reserve Bank of India, sparking major protests from account holders and sending shock-waves through banking circles. According to preliminary reports, the bank’s ‘bad loans’ – or the so-called ‘Non-Performing Assets (NPAs)’ – had more than doubled from ₹148 crores to ₹315 crores over the last year. But we will return to this later in the article, and to the ‘NPA crisis’ in general.
For now, it is important to note that recovery of the balance sheets of public sector banks running in deep losses due to ‘bad loans’ was cited as the chief reason for the Finance Minister’s recent historic decision to merge major public sector banks. That’s where we begin from.
Modi-Shah’s Historic Makeover of the Indian Banking Sector
This August, Union Minister of Finance Nirmala Sitharaman announced a string of mergers of major public sector banks (PSBs) that would bring down the number of PSBs in the country from 27 to 12. The Government also announced infusion of money into the “bad loans” ridden financial sector, in order to stimulate lending that had been falling steadily in recent times. This came after reports that 12 of the 18 state-owned banks that reported losses in the fourth quarter of FY19, have eaten into their capital base to make up for the losses, making it harder for them in turn to raise money from the markets to even keep their business running. According to ratings agencies, state-run banks in the current year need fresh capital infusions of upto a whopping ₹40,000 crore. This was hailed as a part of Prime Minister Narendra Modi’s ‘5 Trillion Dollar Economy Dream’. #PSBsFor5TrillionEconomy trended for the day on Twitter.
This move by the present regime is a historic shift in the Indian banking sector and the economy as a whole, up there in magnitude and consequence with former Prime Minister Indira Gandhi’s move to nationalise banks. While the bank employee unions and associations are battling the merger decisions at their respective workplaces, this is a good opportunity to take a quick look at the history of independent India’s banking policies, leading upto the present times.
1969: Indira Gandhi’s Bank Nationalisation
Throughout human history, banks have been machines for funding businesses. In colonial India, the chief banks were privately owned. The early years post-Independence saw a series of collapses of these private banks. Between 1947-69, around 200 private banks collapsed, many of them losing even their reserves. At this time, credit was concentrated in the hands of only a few big industrialists; as a result, they completely controlled the private banks, as well as the State Bank of India (SBI). (In 1955, the Imperial Bank of India was converted into the State Bank of India.) The economy was faced with a credit crisis. According to the Mahalanobis Committee Report of 1960, only 2% of all credit went to (mostly rich) farmers. The Hazari Committee (1966) warned that unless the banks were nationalised, the Government’s “development efforts” won’t reach the citizens. The report wrote:
“The banking sector itself presents a picture of high degree of concentration. The aggregate [corporate] share of the 15 top banks […] was 78 percent. If the Government-owned State Bank is excluded, … the percentage comes to 60…”
The SBI was also effectively owned by the companies. Even in those days, 48% of the Directors of SBI also held Directorships in firms controlled by private industrial houses.
Apart from the economic crisis, there was also a political backdrop to the decision to nationalise the banks. The Congress Party had just lost State Government elections in 14 states in a mass upsurge of regional and socialist parties, and PM Gandhi needed to win back her mass support. In 1969, she declared the nationalisation of the Indian banking system. Under the PM’s orders, 14 private banks with assets over 50 crores were nationalised. On 15th April 1980, in a second major round of nationalisation, six more banks with more than ₹200 crores of reserves were brought under state control.
Bank nationalisation was followed by dramatic changes in the Indian economy. The now ‘Public Sector Banks’ were asked to set up branches in every corner of the country. Credit-Deposit ratio improved. In 1971, the Credit Guarantee Corporation was formed and in 1975, the ‘Regional Rural Banks’. Every block headquarter had to have at least one bank branch. The number of branches in operation across the length and breadth of the country exploded over a few years. A large number of people were brought, or forced, into modern market economy for the first time at such a scale. According to new regulations, 40% of all credits issued by the public banks had to necessarily go to the ‘priority sector’ comprising of farm work, small businesses, etc. These were small loans at low interest rates, meant for creating personal assets. While in 1969 only 1% of the population owned 40% of assets in the country, by 1980 this had come down to 20%. (For contrast, today it is back up to 58%!) The Industrial Development Bank of India (IDBI) was created in 1964, to lend bulk money to the industry. The National Bank for Agriculture and Rural Development (NABARD) was created in 1982, to mobilise money for lending as ‘cooperative credit’. Centralised schemes such as the Integrated Rural Development Program were taken up to take credit to the poor.
1991: Manmohan Singh’s Economic Reforms
The so-called ‘Balance of Payments Crisis’ set-in in the early ‘90s. In 1992, the World Bank’s loans for developing countries – under the infamous ‘Structural Adjustment Programs’ (SAP) – totaled $5847 million. The terms of these big loans required the governments of these countries to mortgage their entire economies at the European and American markets. Over 14 years, more than 70 countries across the globe had been subjected to 566 International Monetary Fund (IMF) and World Bank ‘stabilization and SAPs’, and were now told that they had to open up their markets for the global money sharks. Faced with the threat of a cut in external funding and aid, these countries had no choice but to implement the painful measures demanded by the IMF and the World Bank.
Here in India, a Committee was set up by the GoI, under Mr. M. Narasimhan. The Narasimhan Committee Reports (I and II) categorised banks as businesses that must be governed with a view towards maximizing profits. In addition to opening up the financial sector to foreign investments, the Narasimhan Committee demanded reduction in cash reserves with the banks, and greater circulation of money. It proposed cutting down on the number of banks, and through a process of mergers and acquisitions, called for the creation of 3 to 4 large banks (including the SBI) that would go on to become ‘International Banks’.
The first such merger/acquisition was the takeover of the distressed New Bank of India (NBI) by the Punjab National Bank (PNB) in 1993. PNB was a solid bank till then with a long track record of profitability, and many times larger than NBI in terms of assets and employees. But still the merger led to PNB recording its first loss (of ₹96 crore) in 1996. The bank also remained embroiled in employee issues for a very long time. Despite the fact that NBI was a “digestible” target for the PNB, the latter took many years before attaining equilibrium. In 2016, the SBI was merged with five of its ‘Associated Banks’. The combined losses of the Associated Banks, with gross NPAs of 20%, wiped out the net profit of SBI for 2016-17. During 2017-18, public sector banks posted a total net loss of a whopping ₹87,000 crore. This was due to mounting pressure from NPAs and a host of scams and frauds. Weak financials pushed 11 banks, out of 21 state-owned banks, into the “Prompt Corrective Action” (PCA) category of the Reserve Bank.
Post ‘90s Privatization of the Banking Sector
Although, because of opposition from bank employees’ unions, the Government couldn’t really privatize the nationalized banks directly, the banking policy itself was restructured to enable privatization of the financial sector as a whole. Restrictions were removed on lending, for example. The idea of “Priority Sectors” was reimagined, and shifted from “Agriculture” to “Agriculture and Allied Industries”, to include for example even Bisleri water bottling plants. Now, even businesses worth ₹250 crore could be classified as “Small Industry” and thereby qualify as belonging to the“Priority Sector”. Small credit, as a result, started drying up again.
Seven new private banks entered the market between 1994 and 2000. In addition, over 20 foreign banks started operations in India since 1994. On the other hand, business for public banks was stifled. The NABARD, which used to raise its money by selling public non-taxable bonds, now had its bonds made taxable. Development banks such as HDFC and ICICI, meant initially for providing credit to development sectors (housing loans in the case of HDFC, and industrial commercial loans for ICICI) were converted into full-fledged private commercial banks. The IDBI Bank, established in 1964 to lend money for industrial development, was similarly converted into a commercial bank. The pulling out of these development banks from big credit meant that private commercial banks relying heavily on people’s deposit money, entered the market of credit – an extremely risky move for the country’s finances and development. Earlier this year, IDBI was re-categorised as a private sector bank. The IDBI bank has been bleeding for years now. We will come back to it later.
Meanwhile, public banks were made progressively unprofitable through steady reduction in employment, and cutbacks in business. For an entire decade, from 1998 to 2008, no permanent recruitments were made in public banks. Existing permanent employees were flushed out by offering cash in exchange for retirement. Out of the total 8,63,117 employees in 26 public banks in 2000-01, more than 1,00,000 (almost 12 per cent) accepted Voluntary Retirement Scheme offers and retired before March 2001, according to a study on VRS published in an Indian Banks’ Association bulletin. According to the Investment Information and Credit Rating Agency (ICRA), private banks may increase their market share in India to 38-40% by FY20.
Why Big Banks?
The main logic that has been presented to the public to back up the decision to merge banks is “capital adequacy” – that is, banks should be big enough to lend capital for big projects. Merging stressed, weaker banks with larger, stronger banks will “enable effective management of NPAs” and allow for “greater credit availability”. This makes no mathematical sense. The Public Sector Banks as a category are short of capital by an estimated ₹2.5-3.5 lakh crores owing to ‘bad loans’. This is the credit that is therefore missing from the market. There isn’t a single bank, not even the giant SBI, that has the kind of spare balance sheet capital to make even a small dent in such a capital requirement. Further, the Finance Minister also said that this ‘greater credit availability’ is only for the rich. She tweeted that Boards of Directors of the banks’ “loan sanctioning thresholds have been enhanced by up to 100 per cent to enable focussed attention to ‘higher value loan proposals’”. This means owners of the banks will now ensure even greater credit flow to the big business families.
The second logic being used to justify this move is that of “economies of scale”. Larger banks are said to derive “efficiencies of scale, reduce risk and improve returns”. Global experience tells us otherwise. In the case of the Wall Street collapse, it was the “4 or 5 world-sized banks” (of the kind that the Finance Minister wants to create) that ran the whole show and eventually threw it off the cliff. In fact, many economists have concurred that it was because of the relatively limited exposure of the Indian public banks to speculative global finance that the shocks of the 2008 global recession were absorbed to an extent by the Indian finance sector.
The main push for building concentrated huge banks comes primarily from the big corporates who currently have to constitute themselves into joint ventures or consortiums, to borrow money from an array of banks, each with their own caps on lending. The merger of banks and the creation of even bigger banks will ease such caps, and make borrowing in bulk easier.
In all of this, the Indian banks – which for our purposes means Indian public money – are becoming increasingly tied to the fluctuations of the world market, that too in times when the entire world economy is passing through a period of unprecedented uncertainties, with global trade wars, looming threats of all-out nuclear warfare, and a speculative bubble that is much bigger than even the 2008 bubble.
The author is an education researcher.