People's Democracy

Hidden Agenda Of Privatisation Of Public Sector Banks

P N Subramanyan

SIXTEEN years back present prime minister, then as finance minister piloted the economic reforms to align Indian economy with the global market controlled by eight developed countries in the world with USA having significant share, reflected in its huge share of 32 percent of the global GDP. The compelling reason for so called reforms has its origin in the destablisation of the fixed parity in the exchange rates of currencies in the year 1973 by replacing it with floating rates. That was a time when USA came to face financial deficit internally and in external trade and that trend is persisting. In the meanwhile, faced with the problem of stagnation and stagflation the USA commenced the exercise of creation of wealth by creating assets resorting to unrestricted speculative activities in the financial sector. These developments imposed burden on the developing countries in the area of international trade and to overcome the same the panacea prescribed by the world bank and the IMF are mainly deregulation of market, privatisation of public sector – both manufacturing and services and less governance by the governments on economic issues and abandonment of governance in social sectors. The total deregulation of the financial sector and the agenda of privatisation of public sector bank is part and parcel of the said reform policy. 

The rulers of our country during the early years of reforms were hesitant on the agenda of privatisation and government after government declared that profit making public sector undertakings will not be privatised. It was consistently emphasised that public sector banks will not be privatised. In fact, learning the lesson from the South East Asian Economic crisis causing collapse of the banks suffering from capital inadequacy and reserves, the Indian government augmented the capital of public sector banks by pumping Rs 20000 crores which with their widespread network of branches could safeguard the stability of banking system. So much so, that they gained the capacity to merge with them almost 10 private sector banks which collapsed during the ongoing reform period. By such mergers, the depositors’ interest and security of job of the employees have been protected and safeguarded. This amazing performance of the public sector banks has become an eye sore and the World Bank, IMF, WTO are constantly pressurising the Indian government to fully deregulate the financial sector and privatise the public sector banks. While such pressurising continues, multinational banks operating in our country obtained or snatched concessions tantamount to imposing deregulation which enabled them to capture increasing share in the assets of the industry which now amounts to 8 percent and another 4 percent off balance sheet which is borrowings from their head offices. By such mechanism their volume of business is far in excess of the liabilities in India. Further, resorting to excessive service charges and on one pretext or the other denying interest on savings accounts of the customer and containing the cost in wages by resorting to multiple unfair labour practices, the operating costs are brought down enabling them to increase profitability to about 4 percent i.e. profit ratio to assets, while in public sector banks that ratio is hardly 1 percent which is at par with the profitability of banks in developed countries. This situation has arisen because the government does not apply the banking policy to the foreign banks which are given freedom to pursue their own super profits motivated business policies. In no developed country, host banks are subjected to such discrimination and in fact migrant banks from other countries are put under strict regulations to follow prescribed banking policies.

Another breach of regulation is that while foreign banks are permitted to open 12 branches per year, by installing hundreds of ATMs throughout India and through their financial subsidiaries, significant retail and consumer banking business are transacted. Citibank alone beside branches have now more than 150 outlets under the guise of Citi financial company. As against this, the application for licence to open a branch in New York made by SBI, ICICI Bank are pending for over two years.

Reforms and deregulations are applicable only to developing countries. Their markets are to be kept open and free for being exploited by the developed countries. Create crisis after crisis and the last target is banking and financial sector. The events of past 20 years reveal that in Latin American countries and East European countries their banks are fully under the control of foreign multinational banks having significant ownership in the capital and assets. Bank acquisitions globally accounted for $ 2.5 billion between 1991-1995, increased to $ 55.5 billions between 1996-2000 and by 2005 it has shot upto $ 123.5 Billion. Consequently in 2005 the share of foreign banks in banking business in Argentina was 48 percent valued at $ 31 billion being 20 percent of that country’s GDP. In Brazil the share is 27 percent valued at $ 107 billion which is 20 percent of its GDP. In Bulgaria the share is 80 percent valued at $ 13 billion, i.e. 49 percent of its GDP. In Chile the share is 42 percent valued at $ 35 billion which is 37 percent of its GDP. In Czech Republic the share is 96 percent valued at $ 99 billion which is 92 percent of the GDP. In Mexico the share is 82 percent valued at $ 342 billion which is 51 percent of its GDP. In Poland the share is $ 68 Billion valued at $ 105 billion accounting 43 percent of GDP of that country. Multinational banks and their financial subsidiaries resort to retail trading and other services which enables them to earn huge income and profits. This is the prize of the deregulation of the banking sector and liberalisation of the financial sector and hailed as universal banks, which is often commended by the finance minister, and for this purpose he propagates merger of public sector banks and their disinvestment. 

Disinvestment opens the gate for eventual privatisation and this route must be opposed. Instead, the alternative of issuing of bonds and preference shares should be encouraged. No individual or institution should be permitted to hold beyond 5 percent of the shares. Already foreign institutional investors are holding sizeable shares in public sector banks as also in the major new private sector Indian banks, as could be seen from the table hereunder:

FOREIGN INVESTMENTS IN CAPITAL OF BANKS  

The financial subsidiaries of foreign banks have a big hand in these investments and at appropriate time they will make their presence felt in many Indian banks probably after 2009, whereafter under WTO rules these foreign banks could acquire 74 percent shares of Indian private banks. Our government has acted magnanimously by permitting this cap already. In the same spirit the government intend to amend the Banking Regulation Act to do away with the restriction of voting rights to maximum 10 percent. These rules and regulations are protected and preserved in the developed countries. The moot question is then why developing countries including India are being pressurised to change. The answer is simple when we see what has happened in Latin America and the East European countries. The foreign multinational banks’ objective is to acquire the local banks – private and public. The banking policy pursued by Indian government has encouraged the foreign banks to step up pressure. In the meanwhile, situations are created permitting the foreign banks and their financial subsidiaries to indulge in trading and services to increase their income and profits. They are exempted from social banking and agricultural credit. These burdens are put solely on the public sector banks, sapping their income and profits. If this adverse playing field continue, they will be rendered week and face the risk of being acquired by foreign banks who with 8 percent market share in the business are already earning $ 36 billion i.e. Rs 162000 crores. The 4 percent share appropriated through their subsidiary, financial companies could be another $ 18 Billion i.e. 81000 crores of rupees.

This disturbing banking policy must be changed. Rules and regulations applicable to public sector banks must be applied to all the banks. Existing common regulations for payment of interest on savings account should be governed by common rules ensuring uniform implementation. In the same manner, common rules should govern service charges. Foreign banks should not be permitted to establish financial subsidiaries since such subsidiaries are being used as banking and trading companies. The globally prevalent regulation of capping on ownership of shares and voting rights as it exists now in India should not be disturbed. Disinvestment must be stopped once for all and alternate mechanism of issuing bonds and preference shares ought to be adopted to strenghthen the capital base. Each Public Sector Bank should further expand by opening new branches since household savings are increasing significantly as can be seen from more than 32 percent increase in bank deposits and demand for credit is about 80 percent of deposits. These measures will go a long way in strengthening public sector banks and the agenda of privatisation will have natural death. The bank employees movement is duty bound not only to save public sector banks but also overall economic interest of the country and large majority of the people.