People's Democracy

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


No. 52

December 30, 2012


Reversing Bank Nationalisation


Prakash Karat


THE passage of the Banking Laws (Amendment) Bill in the winter session of parliament marks a turning point.  The Manmohan Singh government has undone what the Indira Gandhi government did.  The Bank Nationalisation Act nationalised all the major private banks in 1969. Many of these banks were linked to industrial houses.  The 2012 amendment to the banking laws paves the way for the entry of corporate houses into banking.  Thus, the wheel has turned full circle. 


The Manmohan Singh government has effected this retrograde step after repeated efforts since 2005.  During the first term of the UPA government, this move could not succeed because of the firm opposition of the Left parties. 


The Banking Laws (Amendment) Bill sought to achieve two goals. Firstly, the Bill, as originally drafted, wanted to do away with 10 per cent cap on voting rights for the shareholders.  This was necessary as the NDA government in January 2004 had notified that 74 per cent FDI would be allowed in Indian private banks. Prime Minister Manmohan Singh reaffirmed this commitment.  Since the existing law provided for only 10 per cent voting rights, it was an obstacle to a foreign bank investing in a 74 per cent stake and not getting commensurate voting rights. It was in order to facilitate foreign banks taking over Indian private banks that the Bill proposed to do away with the cap on voting rights.


The government argued that there are several weak private sector banks and investment of foreign capital would help to revive the banks.  The Left parties had, at that time, countered this and asked the government to identify the banks which are weak and public sector banks should be encouraged to acquire them.


The Banking Regulation (Amendment) Bill of 2005 lapsed since the 14th Lok Sabha was dissolved in 2009.


The government introduced the Bill again in 2011 in the 15th Lok Sabha.  The Standing Committee on Finance chaired  by the BJP MP Yashwant Sinha recommended that the voting cap can be raised from 10 per cent to 26 per cent instead of just removing the cap altogether.  The government accepted this recommendation. With the passage of the Bill, foreign banks and foreign financial institutions can acquire control with 26 per cent voting right and by adopting various devises. 


The other aspect of the Bill adopted is that it enables new banks to be set-up in the private sector.  The Reserve Bank of India has been empowered to license and regulate such banks.  There will be no bar on corporate houses opening banks.  Prior to nationalisation in 1969, most of the private banks were linked to industrial houses – United Commercial Bank to Birla firms, the Oriental Bank of Commerce to Thapar companies, the Central Bank of India to the Tatas.  Banks controlled by industrial houses used the public deposits for their own purposes and excluded the farmers and small enterprises from access to finance. 


One of the main objectives of bank nationalisation was to break the unholy nexus between big business houses and banks since it seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries.  It is after nationalisation that the public sector banks developed the banking network and provided agricultural credit and evolved priority sector lending.  There are over 65,000 branches of public sector banks. The branches in rural areas which were 58 per cent of the total in 1991 declined steadily after liberalisation and was 40.8 per cent in March 2011.


The Reserve Bank of India had resisted the neo-liberal arguments of the Manmohan Singh government and was visibly reluctant to endorse the entry of new private sector banks including those sponsored by corporates.  Even after the NDA government’s announcement to allow FDI in banking up to 74 per cent, the Reserve Bank of India was of the view that, “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with  businesses….Diversified ownership becomes a necessary postulate so as to provide balancing stakes.” (Chapter VIII of RBI’s Report on Trend and Progress in Banking in India, 2003-04).


P Chidambaram, as the finance minister in the first tenure of UPA government and subsequently in the second tenure, has done everything to push for the neo-liberal reforms in banking.  Faced with the reluctance of the RBI, the finance minister declared that the RBI would oversee and have a final say on the opening of new private sector banks.  He sought to neutralise the RBI reservation by decreeing that the Bank would be the sole arbiter and regulator of the banks.  The RBI subsequently brought out draft guidelines for the opening of new banks.  A number of corporate houses like Reliance Industries, Aditya Birla Group, Mahindra & Mahindra, Tatas and Larsen & Toubro have expressed interest in opening banks in August 2011.  With the passage of the Bill, it will be a matter of time before new private sector banks enter the fray, many of them set-up by the corporates. 


After the global financial crisis in 2008, when several banks and financial firms collapsed in the US and Europe, the Indian banking system was unshaken.  The main reason for this was the failure of the Manmohan Singh government to push through financial sector liberalisation. Its move to allow foreign banks to take over Indian banks was stalled  by the Left. 


This did not, however, stop the Congress party from claiming credit for the Indian banking system withstanding the financial crisis in the Congress party’s Election Manifesto for the Lok Sabha elections of 2009.  The UPA government’s success in weathering the financial crisis was attributed to “government ownership of banks that is the legacy of Indira Gandhi”.  Today, the Congress party is undermining this legacy.   


The Left parties pressed certain amendments and voted against the Bill. Only the AIADMK, the TDP, and the BJD MPs voted along with the Left in the two houses. The Congress-led government was able to get the Bill passed because of the support of the BJP.  This, once again, underlines the fact that when it comes to serving the interests of big business in India and international finance, there is no difference between the two parties.  Both are willing agents and advocates of neo-liberal reforms.  The only concession that the BJP got from the government was the dropping of the dangerous clause permitting banks to participate in forward trading of commodities.


The UPA government is pushing ahead with banking reforms which means more privatisation and financialisation of the banking system.  In the last two decades, the RBI has licensed 12 banks in the private sector – ten banks in 1993 and two later.  Increase in private sector banks, privatisation of equity in public sector banks, shift in banking practices away from developmental and social needs are the hallmark of the neo-liberal reforms.  The American pattern of “innovative financing” through different kind of derivatives, including credit derivatives, have been introduced in the banking system. 


In short, every practice in banking which led to the financial crisis and instability in 2008 in the West is being introduced in India in the name of financial sector liberalisation. The push for financial sector liberalisation is at the heart of the neo-liberal reforms.  This is meant to align the banking and financial institutions of the country with the needs of the international finance capital. 


With the opening of multi-brand retail to FDI, the move to increase the FDI in the insurance sector to 49 per cent and privatisation of pension funds, the Manmohan Singh government is well and truly acting as a servitor for international finance capital and big business.  The Left parties and the working class movement have to gear up to counter this offensive with greater vigor.  The strike conducted by the bank employees against the passage of the Banking Laws (Amendment) Bill should be followed up with wider struggles. The two-day general strike on February 20 and 21 should be a powerful protest against these policies which are undermining the people’s interests and handing over the resources of the country to foreign finance capital.