Millennium Post

Public money in Private interest

Public money in Private interest
Reforms are necessary for any society, provided they are progressive. Progressive reforms entail more freedom and liberalisation. However, when it comes to the banking sector, the same may not turn out to be true. The proponents of international financial integration came under a cloud in 2008 when the financial bubble burst in the USA, creating ripples across countries. Its lingering effects can still be felt in the European, Asian and several emerging economies. American Nobel laureate economist Joseph Stiglitz raised concerns in a 2010 US National Bureau of Economic Research (NBER) paper over the global financial markets’ integration and pointed out that a failure in one part of the international economic system had led to a global meltdown.

Cut to the Indian banking sector. It has its own myriad issues and the country’s apex bank, the Reserve Bank of India (RBI), tries from time to time to revamp the financial sector in the country in order to better the economic structure.

As per a Reserve Bank of India report, 52 per cent of our population does not have direct access to banking. Small farmers and labourers engaged in miscellaneous work in rural areas resort to private financial lenders who charge exorbitant interest rates, thus often driving the indebted poor customers to extreme steps such as suicide. After the economic liberalisation process was started in the 1990s, competition has increased due to the presence of private and foreign banks but their presence remains limited to metro cities and urban areas. The onus of financial inclusion is being borne only by the public sector banks in the country.

As part of its road map unveiled in 2005 which comprised two phases, the Reserve Bank of India has made two major announcements in the past one year, which may end up having serious implications for the economy. First, it invited applications from corporate and private entities for new bank licences and second, it issued guidelines for the expansion of foreign banks which would require them to incorporate themselves locally in order to get ‘near national treatment’.

An intriguing statement was made by RBI Governor Raghuram Rajan when he said that the foreign banks would also be able to take over ‘small private Indian’ ones, which created quite a stir.

All India Bank Officers’ Association (AIBOA)  General Secretary S Nagarajan said, ‘Foreign banks cater only to the demands of high networth individuals (HNIs). During the securities of scam of 1992, it was the foreign banks which had indulged in stock market manipulations and created sufficient discomfort in the banking sector.’

Commenting on the  takeover issue, Nagarajan elaborated, ‘We have on our hand a fine example of the erstwhile Vysya Bank, a private sector bank which was taken over by the Netherlands ING group. The name first was VYSYA ING and now it is ING VYSYA. They were into international and insurance business, specifically, besides other normal activities of finance related matters. Now the insurance stake has been sold to EXIDE batteries and except for the international business, they want to exit from all local banking activities, as stated by a report.’

The RBI principle asks foreign banks to earmark 40 per cent of their lending operations to the priority sector in line with the domestic banks. All India Bank Officers’ Association says that even if they are compelled to lend money under the priority sector, they would want to invest bulk in a single activity instead of giving loans to needy segments of society. Further, the charges related to banking activities are high and our people can ill afford to pay such exorbitant sums. Indian public sector banks (PSBs) have proved by  their conduct that they are nation building instruments. Hence, the financial inclusion exercise has to be entrusted to public sector banks at the rate of one PSB branch for a population of 2,000.

Now, coming to the other contentious issue of the Reserve bank of India granting bank licences to the corporate sector, the RBI has received over two dozen applications from private entities which also include corporate houses like Reliance Capital, Aditya Birla Nuvo. However, some applicants like Tata Sons and Videocon have already withdrawn from the race due to various other reasons.

Given the sensitivity of the sector because public money is involved, the Parliamentary Standing Committee  headed by Yashwant Sinha has also expressed reservation on the Reserve Bank of India’s mandate.

The report says, ‘Banking being a highly leveraged business involving public money and public welfare, the committee (members) are of the considered opinion that it will be more in the fitness of things to keep industry and banking separate.’

Many Economists and financial experts have expressed fears that the corporates engaged in the banking business would divert the public funds to the meet the requirements of their business houses. The Parliamentary report says that industrial or business houses may not be geared to achieve the national objectives of financial inclusion, priority sector lending, etc. Echoing the House panel’s concerns, Nagarajan said, ‘The banks promoted by private sector entities will definitely draw certain benefits arising out of the risk they take to establish new entities. There is no lunch called free a lunch, goes the French proverb. It goes without saying that with small contributions as capital by private entities, they will garner from innocent investor and benefit themselves.’

‘During the first phase of reforms, 12 private banks were established. A good number of them have since folded up through the process of mergers and takeovers, which has also hampered competition. Expansion of public sector banks is the only alternative, as the confidence of the public in PSBs is high,’ pointed out Nagarajan. ‘Trust’ is the opoerative word. The Indian people have reasonable trust in the public sector banks because of their record of public service  and reliability. They don’t really trust private banks,  both domestic and foreign — because the phrase ‘private bank’ has just become a euphemism for consistent graft and siphoning of public money.
Meenakshi Thakur

Meenakshi Thakur

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