People's Democracy

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


No. 20

May 19, 2013


An Attack on Development Banking


Prabhat Patnaik


“Development banking” is anathema for the corporate-financial interests for several reasons. First, the very idea that certain special financial institutions (“development banks”) pursuing certain specific objectives, which are not reducible to mere profit-maximisation, are needed in an economy pursuing an agenda of development, implies a rejection of the adequacy of “free markets”. It implies that the usual banking institutions, operating in financial markets to make profits, are not good enough for ushering in development. It therefore constitutes a rebuff to neo-liberalism, the ideology projected by the globalised corporate-financial interests.


Secondly, such institutions of “development banking” constrict the space available for profit-making commercial banks to operate. They take “business” away from finance capital which it resents.


Thirdly, “development banking” cannot survive without government support. To recognise the need for “development banking” amounts therefore to conceding that the State has to play a major role, other than merely via supporting finance capital, for promoting development. It shows up, simultaneously, both the shortcomings of finance capital, and the need for the State to intervene independently of finance capital.


Fourthly, and most importantly, any concept of “development banking” necessarily implies, in an economy like ours with its plethora of petty producers including peasants, support for such producers, as against large corporate entities and multinational corporations. “Development banking” in short is by its very nature aimed to stem the processes of primitive accumulation of capital and of centralisation of capital. Since neo-liberalism, pursued in the interests of the corporate-financial oligarchy, entails above all the processes of primitive accumulation-cum-centralisation of capital, “development banking” is fundamentally against the thrust of neo-liberalism.




Not surprisingly, therefore, the concept of “development banking”, in the sense of having a banking system that prioritises certain target groups of small borrowers and offers them loans at specifically low interest rates, has been attacked from the very beginning of the neo-liberal counter-revolution in the realm of economic ideas. What the World Bank calls “financial repression”, as opposed to “financial liberalisation” (notice the tendentious use of language), ie, enforcing specific lending targets for preferred groups and charging them low interest rates for achieving the social objective of greater inclusiveness, was among the first targets of theoretical attack by the neo-liberals. The actual theory underlying the attack (eg, by two authors Mckinnon and Shaw who pioneered the counter-revolution in this area) was wholly erroneous and harked back to ideas preceding the “Keynesian Revolution”. But the power of international finance capital pushing for financial liberalisation, ie, for exposing a country’s financial system to the vortex of globalised financial flows, never depended on the correctness of its ideas; correspondingly it could not also be stopped by the wrongness of its ideas.


We have therefore seen in the “reform” years a plethora of measures, attempting to privatise the banking system, attempting to induct foreign banks into the Indian economy, attempting to dilute priority sector “norms”, converting companies (including some engaged in development banking earlier) like IDBI, ICICI and HDFC into banks. But compared to all these measures, what the government is planning now literally “takes the cake”. And this is to wind up NABARD’s apex role in the development banking system of rural India.


A bill is about to be brought to the parliament that provides for an amendment to the NABARD Act of 1981 along the following lines: first, the authorised share capital of NABARD is to be raised from Rs 5,000 crores to Rs 20,000 crores; and private capitalists are to be allowed to purchase these new shares, which in effect opens up NABARD for eventual privatisation. Second, RBI shares in NABARD are to be taken over by the government of India, which means snapping the link between the RBI and the NABARD, and hence doing away with the very rationale with which NABARD was carved out of the RBI as an apex body for rural development finance. Third, NABARD is to be allowed to lend not just to the farm sector or to government agencies engaged in rural development, but to a list of institutions approved by the government of India, including large private borrowers. The idea in short is to do away with the special role of NABARD as an apex body providing cheap credit for agriculture and rural development and to convert it into an agency owned by private capital and providing loans to private capital.


NABARD’s role over the years no doubt has been much attenuated. Much of its resources originally came from the profits of the RBI. Since these profits were supposed to belong to the government of India, the resources of NABARD came in effect from the GOI’s fisc, which made it possible for NABARD to provide credit at extremely low rates of interest.


With the massive inflows of external finance into the Indian economy, however, the RBI had to do two things: first, it had to step in to prevent the exchange rate from appreciating, by adding to its foreign exchange reserves; and secondly, it had to mop up the money it had created against these foreign exchange reserves, which had found its way into the coffers of the commercial banks, by selling to them income-yielding bonds of the government of India s(this latter activity was called a “sterilisation operation”). This meant that in the RBI’s own portfolio, foreign exchange reserves replaced bonds of the government of India; and this happened entirely as an enforced  reaction to what globalised finance was doing (namely bringing funds into India), not out of any voluntary decision on the part of the RBI itself.


But since foreign exchange reserves earn very little (perhaps not even one per cent) while government of India securities do earn substantial interest, this substitution forced by financial inflows in the RBI’s asset structure, entailed a sharp drop in the profits of the RBI, and hence, under the circumstances, in the resources of NABARD. NABARD’s resources were augmented through borrowing on the market, which was more expensive; hence NABARD’s capacity to give cheap loans for agriculture and rural development also got restricted by the behaviour of international finance capital.




Neo-liberalism had thus already impinged to an extent on the effectiveness of NABARD. Nonetheless NABARD continued to play an important role in sustaining the system of cheap credit for agriculture and rural development. NABARD funds, made available at around 6 per cent interest rate up to a specific limit to each state government for instance, was a valuable source of state plan funds; and since these could be used only for certain specific projects in keeping with NABARD’s mandate, there was little scope for their “diversion” for other purposes such as plan support for private capitalists, or for the building of “infrastructure” in the form of malls, shopping complexes or PPP-based real estate projects. The funds came cheap because the interest rate was lower than charged on central plan assistance; and they were used for projects directly beneficial to the people. Quite apart from loans to agriculture and rural development, NABARD’s loans to state governments too were of great usefulness.


The corporate-financial interests however were persistent in their effort to undermine the developmental role of NABARD. The recent exposure of NABARD’s financing (or refinancing), at 1.5 per cent interest rate, of warehousing projects of the corporate sector, is a case in point (The Hindu, May 13). What is more, NABARD appears to have taken a decision at its Board meeting to finance corporates and MNCs out of the Rural Infrastructure Development Fund announced in the recent central budget. NABARD on its part has shifted the blame, for financing corporate warehousing projects at concessional rates of interest, to the Reserve Bank of India and the ministry of finance.


But no matter who is culpable, whether it is the RBI or the ministry of finance or NABARD itself, the fact of subversion of NABARD’s basic developmental role, of helping small farmers with concessional credit, under pressure from the corporate-financial interests, is undeniable. The specific case highlighted by The Hindu may have been shelved, but this pressure remains. And  this pressure, instead of producing individual “aberrations”, is now being used for a structural change in the very nature of NABARD itself through the proposed amendment to the NABARD Act, which would be a severe blow to development banking in the country. But this blow, as mentioned earlier, is in keeping with the thrust of neo-liberalism.


What the proposed legislation exposes is the true nature of the central government. The agrarian crisis in the country, with the mass suicides it has brought in its train, is a grim reality. The Swaminathan Commission which the central government itself had set up in the context of this crisis has recommended that credit should be made available to peasant agriculture at 4 per cent interest rate. The thrust clearly therefore is on an expansion in the scope of development banking, ie,  for a reversal of the trend witnessed hitherto of banks reneging on their commitment towards peasant agriculture. But, far from ensuring this, what the proposed legislation ensures is that even the one agency charged specifically by its very mandate to aid peasant agriculture will now be exonerated from this task.


It is well-known that foreign banks operating in the country do not even bother to meet on paper their priority sector lending targets; the same is true of private banks. Nationalised banks’ performance on paper is somewhat better, but so diluted has the concept of “priority sector” become that credit for this sector has ceased to be synonymous with credit to peasant agriculture. It is a well-known fact that, notwithstanding the existence of priority sector norms, peasants have had to turn increasingly to private moneylenders, many of whom are none other than the so-called “facilitators” employed (as middlemen) by banks and allowed by the Reserve Bank itself.


Every step of opening up the financial sector to private or foreign ownership amounts ipso facto to a constriction of institutional credit to peasant agriculture; and such steps have been coming thick and fast of late. The amendment of the NABARD Act is a further giant step in that direction, a step back to the days before independence when the peasantry groaned under the burden of usury and when per capita food availability in the country declined precipitously. This legislation which takes us back three quarters of a century needs to be fought vigorously.