People's Democracy

New Private Banks: For Whose Benefit?

Veeraiah Konduri

THE Reserve Bank of India recently released a discussion paper on “Entry of New Private Banks” and sought opinions by the end of September 2010. The paper had a long prologue to justify its call for discussion, quoting from the budgetary commitment of the government as well as its cry for financial inclusion. The paper said, “though Indian financial sector made an impressive stride in resource mobilisation, geographical reach, financial viability, profitability and competitiveness, vast segments of population, especially under-privileged sections of society, have still no access to formal banking services.” Then, in an attempt to theorise the impact of this non-coverage in policy terms, the paper opined, “A wider distribution of and access to financial services helps both consumers and producers to raise their welfare and productivity.” It also gave a long annexure of the experiences from various countries. The RBI wants to focus on the debate by suggesting that “a large number of banks would promote financial inclusion, and ultimately support the inclusive economic growth.”

NO HONEST

DISCUSSION

There are certain issues worth pondering regarding this discussion paper. The first is the contradictory nature of the motive. The central bank has itself felt and acknowledged that the Indian financial sector, particularly the banking sector, has since its nationalisation made impressive strides in resource mobilisation, geographical reach, profitability and competitiveness. Then the question is: where is the need for opening up the sector for private banks? The title of the discussion paper gives only partial truth. If we take the RBI's comment that “vast segments of population, especially under-privileged sections of society, have still no access to formal banking services” as an honest acknowledgement of its failure to ensure such access, then the discussion paper should have focussed on the factors desisting the vast sections of people from accessing the financial services. The important factor that impacts the people’s choice in this regard is their capacity to do so. This includes the availability of disposable income and the saving after meeting the domestic needs. It is such savings that are put to productive uses through the banking services. This is the demand side picture of accessibility of the financial services.

The supply side of provision of the banking services is that a person who desires to avail these services or whose needs the government wishes to cater, must not suffer a loss of any of his natural sources of income. This brings into question the proximity of the branch, transaction cost, incentives to depositors, etc. Surprisingly, however, the discussion paper spared itself from raising these issues. The paper confines itself to a discussion of minimising the transaction cost through the use of sophisticated technological devices.

With the type of agenda set out for discussion, however, the RBI has already taken a policy decision of allowing more private banks. It is evident, then, that releasing the discussion paper was part of a motivated attempt to make the concerned community an unwilling partner in its privatisation design. To view the issue holistically, an obvious question would be whether India needs more bank branches to increase the outreach or more new banks. Thus we can say that the discussion paper is not an honest attempt to address the supply side or demand side concerns of financial inclusion.

The discussion paper also avoids the long settled question as to whether industrial houses must be allowed to run the banking services. Allowing them to do so is nothing but questioning the justification behind the banks nationalisation when they were taken over from industrial houses. Another major goal of nationalisation was to make the funds with the banks available for comprehensive development of the nation. Though the RBI has desisted from saying so openly, the eligibility criteria laid out for entry of new players into banking services surely suggest that the RBI is for helping the big industrial houses usurp more space in banking sector. Even now, some industrial houses have, directly or indirectly, controlling stakes in some private banks in the country. It is evident that financial sector reforms are being pushed in the name of financial inclusion, refusing to learn any lessons from the recent global crisis of finance capitalism whose impact the world economy is yet to come out of. In the deep pits of Lehman Brothers and other giants, we do have a lesson or two about the consequences of unfettered financialisation of economy.

SHIFT IN

ORIENTATION

Regarding the status of Indian banking industry today, the discussion paper merely gives the number of functional banks and branches. This does not give us any clear picture and we need to look at some more numbers. The data below cover two different phases of financialisation of Indian economy. In one phase the government's intention was to increase the access to financial services with a pro-people orientation and in the other, the same principle is being implemented with a pro-market orientation.

After the banks nationalisation, the resource mobilisation strategy of banking industry focussed more on the rural than urban on areas. This reflected in the fact that rural deposits went up from 6.5 per cent in 1972 to 15 per cent in 1989 whereas the share of deposits from metropolitan centres went down from 46.2 to 38.6 per cent in the same period. Rural credit also witnessed an upward swing from 4.6 to 16.3 per cent between the same years while the credit available in metropolitan areas went down from 60.2 to 43.5 per cent.

This increase in rural credit was predominantly due to the governmental support to agriculture at that time. Contrary to this feature, after the government embarked on ‘reforms’ in 1991, pro-rural banking has taken the back seat. This reflects in the declining reach of rural services, a decline in rural deposit mobilisation and a reduction in rural bank branches. By March 2009, the share of rural deposits in total bank deposit stood at a mere 9.3 per cent. This indicates a reduction in bank branches where the rural poor may deposit their savings, and also the magnitude of distress that Bharat is undergoing in the ‘reforms’ dispensation. It is a fact that agrarian distress has exacerbated in the ‘reformed’ India. At the same time, urban banking has witnessed an upward swing and increase in the share of urban deposits in total bank deposit to 56.2 per cent. It is also important to remind that after nationalisation, banks were so governed as to meet the national requirements and it was made explicit that a bank wishing expansion has to open four branches in rural areas for every new branch in urban areas.

Despite the widespread assertion that rural India has come out of agrarian distress under the UPA regime, the share of rural deposits went down from 12.9 per cent in 2004 to 9.3 by 2009. This is the status even though the government, under certain schemes, deposits the amounts to the beneficiaries’ accounts directly. The RBI discussion paper did not even attempt to discuss this harsh reality.

Financial journalist Manas Chakarvarty has brought out one more aspect on the reach of banking services. Out of the total credit that banking industry is doling out, north eastern states got 1.27 per cent in 1972 and it went up to 1.97 by 1989 basically due to the stress on expanding the geographical outreach of banking services. But after the government embarked on ‘reforms’ and began giving the banks profit targets to prove their competence, the share of credit to the North East went down to 0.86 per cent. Same was the case with Madhya Pradesh and Uttar Pradesh. Madhya Pradesh's share in total banking credit increased from 2.07 in 1972 to 4.28 per cent in 1989 but slipped down to 2.9 per cent by 2009. UP got 5.6 per cent of total bank credit in 1972, it went up to 7.26 per cent by 1989, but is down to 4.75 per cent now.

NO BLUEPRINT

FOR COVERAGE      

The discussion paper argues that allowing more banks under private management and allowing industrial houses and non-banking financial institutions to enter into regular banking activities,  will help to enhance financial inclusion. But the facts dispel this optimism. Since 1991, no rural bank branch has been opened by a private sector bank. This is so even after allowing 12 new private banks and also some foreign banks to undertake operations. Neither the American Bank nor the HSBC or the Axis Bank operates in rural areas. Nor did they ever come up with a blueprint of extending the financial services, as desired by RBI, to the areas which are bereft of these services. Also, the private banks which we see in urban centres are the result of mergers and amalgamations which do not expand their geographical reach. If the government is asking the nationalised banks to be competitive, why does it not ask a private or a foreign bank to expand its reach? If there is no comprehensive blueprint and a time bound coverage plan, we can't even think that the forthcoming new entities will reach out to the deprived regions and classes.

The RBI has not inserted even a few clauses in the discussion paper to reflect its commitment to financial inclusion. To improve the reach of banking services and enhance inclusion, the key is to make the banking services affordable. This requires reduction in operational costs in the first place. Turning this fact upside down, however, the paper argues in favour of allowing new private and foreign banks. The idea is that they will come with more effective devices to minimise the operational costs. This means that instead of broadening the customer base to absorb the operational costs, RBI is suggesting the use of technological devices, a la the banks in the West. It would have been more appropriate for the RBI if it provided in its paper a comparative statement of operational costs across the major banks, including the existing private banks. This could encourage a reasoned discussion on the role of private banks in reducing the operational costs. But it has not done so. These so-called tech tools are used to reach out to crorepati customers rather than ordinary ones. Further, even if banks in the West have more effective technologies, such tools did not help them withstand the global financial crisis as the banks in India did. In this light, the idea of opening up the banking sector to private and foreign players would look only ill-motivated.

PLEA OF

CONSOLIDATION

Another plea is that allowing private players in this sector would improve competitiveness and ultimately benefit the customers. Competitiveness and consolidation are intertwined aspects of financial reform. The country’s biggest bank is SBI. With its 352 billion dollars asset base and 285 billion dollars in deposits, it is ranked 70th in the global list. Keeping this in view, the Narasimham committee in its second avatar recommended three-tier banks consolidation --- 2-3 banks with international characteristics on the top, 8-10 banks in the middle to cater to the national needs, and then some catering to the local level needs. The government has accepted these recommendations in full, feeling that the Indian financial sector is not much globalised. In this era of globalisation, Indian corporates are emerging as MNCs, opting for large scale acquisitions in the international arena, which requires large scale availability of liquidity with the country’s financial sector. But as Indian banks have not that much strength, our corporate houses are forced to look to foreign sources for resource mobilisation to meet their expansionary requirements. External commercial borrowing is one of such tools which the global capital uses to meet their domestic friends’ needs. This is the background in which the government is favouring consolidation of banking sector in India.

This is evident from the statements of successive finance ministers. Latest in this sequence is Pranab Mukherjee’s statement in post-budget briefings when he said, “consolidation may be necessary to improve the state of competitiveness of Indian banking globally.” The finance minister also assured that any consolidation moves by banks would be viewed positively and as major shareholder the government would play a supportive role in the process. The proposed consolidation may help the banks like SBI to move up in its ranking, and foreign entry will help them mobilise deposits across the world. But this kind of consolidation leads to the emergence of investment-banking model which is prevalent in the West. This may also fuel record profits for the entities. But it does not in any way help the poor and middle class customers who deposit their savings with such entities. The consolidation process, while catering to the needs of emerging Indian MNCs, would obviously siphon off the domestic savings which are meant for investment in priority sectors like agriculture or small and medium enterprises, and deploy them elsewhere in the world.

The RBI has also contended that unless it allows more banks in private sector, it cannot open the field for competitiveness. But the entry of more private banks will have adverse impacts for two reasons. The nationalised banks are mandated to lend 40 per cent of their total lending to priority sectors whereas private banks can do this up to 32 per cent. The RBI views the nationalised banks as instruments of social policy, but private banks are exempted from meeting the social policy requirements. Secondly, the RBI is giving the private banks an opportunity to poach the sound customer base of public sector banks. Once the banking sector is globalised, it loses its local feel; it will be delinked from local markets and their developmental aspirations as they are areas of lower margins. This is another way of siphoning off national savings, leaving the priority sectors and rural areas high and dry. This will as well force the country to depend on more foreign sources to finance its development. Opening the financial sector to foreign and domestic private players will thus harm the national developmental goals, which would not only impact the growth opportunities adversely but also exacerbate the inequalities.