People's Democracy

(Weekly Organ of the Communist Party of India (Marxist)


No. 07

February 18, 2007

‘Resist Efforts To Undermine RBI’




SERIOUS efforts are on to undermine the present crucial role of the Reserve Bank of India (RBI) as a regulatory central bank, which if allowed to succeed would have a dangerous impact on the nation’s economy. The RBI employees along with the democratic forces must resist these efforts.


This was the call given by CPI(M) Polit Bureau member B V Raghavulu while delivering his inaugural address at the recently held golden jubilee celebrations of the RBI employees association in Hyderabad. He said what we are witnessing today is a state of transition in RBI. Efforts are on to cut the role of RBI and modify its core and fundamental character – clipping some of its functions, abridging a few others and hiving off some more. He warned that these changes would lead to dismemberment of the Bank, making its existence in name only.


Raghavulu noted that this gradual process of amputation of RBI would hamper the economic development of the country. RBI has been playing an effective role in nation building through every facet of credit dispensation in addition to performing its traditional central banking functions like supervision and regulation. He felt that the ongoing changes in the banking policy would undo the achievements made so far. Accepting that changes in the banking policy are needed and the deficiencies at the policy level must be rectified, Raghavulu said that these should not result in altering the fundamental nature of banks. He called for resisting such changes and simultaneously fighting for an alternative banking policy.


Raghavulu warned about the dangers of the UPA government’s efforts to totally change the management-control policy. So far in private banks, irrespective of the size of share holding, the voting rights were restricted with a ceiling of 10 per cent. Now the government of India is preparing to remove this ceiling and provide voting rights in proportion to the share holding. If this were allowed to happen then MNCs would gain control of the private sector banks. They would also establish a firm hold on the public sector banks, in effect obscuring their public sector character. All this would finally lead to compromising the economic sovereignty of our country, he warned. Raghavulu said that prior to nationalisation of banks in 1969, during the “social control” period, voting rights were restricted to just 2 per cent. The rationale behind this was that the money the banks deal with is the depositors’ money unlike in any other industry.


However this is sought to be changed now by changing the existing legislation of parliament. He noted that not everyone in the government are in agreement with the proposed policy framework and that there is a conflict going on within the government on this issue. Raghavulu called upon the delegates to resist and vehemently oppose the proposed changes. 


Throwing light on the impact of the proposed changes, he cited Global Trust Bank (GTB) and Western Union Bank experiences as classic examples. While the depositors were saved in the case of GTB, the collapse of Western Union Bank was pre-empted by its merger with IDBI Bank, he said.


Raghavulu said the dilution of RBI supervisory norms is already having an impact on the banking system. He observed that in the case of urban banks, RBI supervision was a disaster. Even the ones with scheduled status have crumbled like ninepins and hundreds of crores of rupees of depositors’ just evaporated courtesy the loot of the urban banks’ directors.


On the trend of small and medium banks merging to become bigger ones, he said despite many studies and researches conducted in this regard, it has not been proved that the bigger the bank the higher is the advantage. Continuous consolidations and merges do not impart any focused strength to the emerging entities. At best it would empower managements with greater clout to brow-beat the borrowers in a deregulated environment, said Raghavulu.


Stressing the need to give due importance to development and social banking, he called for correcting the existing imbalances in credit-deposit ratio in different regions. Policymaking, regulatory and developmental role hitherto played by RBI to the best advantage of the national economy must be continued. Profit alone should not be the criterion for developing bank branches network, observed Raghavulu. He further said that RBI should act judiciously in implementing the economic reforms. Alternate banking policies suitable to the Indian environment must be developed and sustained. 


In conclusion, Raghavulu said that the reforms within RBI should not result in negation of its hitherto pre-eminent position as a regulator, supervisor and architect of development. The changes on the anvil are basic in nature and influence the very future of central banking authority of the country and therefore it is imperative that the scope and ambit of changes should be passed through the parliamentary intervention and not through an administrative fiat.