People's Democracy

Changes Being Mooted in the Banking Sector

Prabhat Patnaik

NEW banking licenses are to be issued to the private sector post-haste before January 2014. This is the third occasion, after 1994 and 2001, when such licenses are to be given. But this time, unlike on the two earlier occasions when the Reserve Bank of India had explicitly forbidden it, corporate houses too are to be allowed to get such licenses. Not surprisingly, some of the biggest corporate houses, the Tatas, Birlas and Reliance, are in line to get bank licenses.

This threatens to take us back to the days before bank nationalisation in 1969, when all big houses had their own in-house banks. Indeed all the big banks at the time were owned by corporate houses which mobilised deposits from the public for promoting the interests of their respective groups. Banking meant furthering the group’s strategy; credit went where the group’s interest demanded; and sectors like agriculture where peasant production dominated and the corporate groups had little interest at that time, were cut off from institutional credit.

FUNDAMENTAL SOCIAL

SIGNIFICANCE

Bank nationalisation was meant to change all that. It was based on a simple premise, namely that banking was different from other activities, that the “credit market” differed from other “markets”. In other markets, like say the furniture market, commodities are sold against pre-existing resources in the pockets of the buyers: sellers exchange C for M and buyers exchange M for C. In the credit “market” however new resources (or command over resources) are put into the pockets of the customers: fresh M is created by the banks which give it to borrowers against only IOUs. What the banks give out is command over capital; whom they give such command to determines the entire trajectory of development. What banks do is therefore of fundamental social significance, since it determines whether growth occurs at all, which sectors grow, which groups grow and which regions grow. And if what banks do is of such fundamental social significance, then society must have control over what banks do. This was the logic of bank nationalisation which was carried out after a brief period of futile attempt at what was called “social control over banks”.

This logic remains as valid today as it ever was. The neo-liberal argument which has surfaced since then does not, indeed it cannot, contest the fact that society has priorities which banks must serve. What it says is that banks can serve these priorities if left to their own devices, ie, if the credit “market” is left free, subject to obeying certain overall parameters of monetary policy.

This argument however is erroneous for two obvious reasons. First, freeing the credit “market” can never bring adequate institutional credit to peasants and petty producers, in which case either the sectors where they are located must languish, to the detriment of society; or they will perforce be replaced by corporate capital, causing acute mass distress, which again no society can tolerate. Second, the market, as John Maynard Keynes had pointed out long ago, is intrinsically incapable of differentiating between “speculation” and “enterprise”. Hence in a free market not only does “speculation” thrive at the expense of “enterprise”, but this fact brings periodic mass ruin to the wealth-holders themselves. Since we have just seen an example of such mass ruin in the 2008 financial crisis, from which banks had to be bailed out by the provision of as much as $ 13 trillion from the public exchequer in the US, there is no need to labour the point. (Incidentally when this astronomical sum was being provided from the public exchequer nobody talked of the “virtues of the free market”!).

There is in short no alternative to social control over banks if social goals are to be achieved and the only effective way of exercising such control is through public ownership of banks. If private ownership of the means of production in general is inimical to social good, then private ownership of banks is quintessentially so.

But the persistent demand of international finance capital has been for privatising publicly-owned banks in India, which even the Manmohan Singh government has not been able to accede to, because of the enormous opposition that such a move will invite. Indeed, imperialist agencies, aware of this problem, have even scaled down their demand. Successive US administrations for instance have demanded that “only” the State Bank of India should be privatised: since the SBI is by far the biggest bank in India, and one of the largest in the world, its privatisation alone is a sufficiently attractive prospect for finance capital. But even this will arouse opposition which no neo-liberal regime in the country can possibly overcome. Allowing corporate houses to set up banks therefore is a backdoor attempt at privatising the banking system of the country.

Another pointer in the same direction is the invitation by RBI governor Raghuram Rajan to foreign banks to operate in India on a much larger scale. Once foreign and domestic private banks have started operating on a sizeable scale, the government, which can always run down the public sector banks under its control,  can encourage “mergers” between private and public banks, or “takeovers” by private banks of public ones, in which case privatisation of public sector banks would have occurred in a roundabout manner without generating the same degree of opposition that a direct attempt at privatisation does. We are thus witnessing an insidious undermining of bank nationalisation, which is perhaps the most significant progressive economic measure enacted in post-independence India.

This has an immediate implication that must be noted. Bank nationalisation had brought institutional credit to sectors of petty production neglected until then, and above all to peasant agriculture. Of course, the distribution of such credit had been unequal across the peasantry; it is the rich peasants and the landlords who had been the biggest beneficiaries of institutional credit. Nonetheless the Green Revolution would have been impossible without the disbursement of institutional credit on the scale that bank nationalisation ensured. Notwithstanding inequalities in credit disbursement within agriculture, the constraint that the stagnation of this sector had imposed on the development of the Indian economy, which became manifest in the mid-sixties food crisis (and the Bihar famine) and which made India dependent upon imperialism for food imports, could be overcome through increased institutional credit to agriculture. True, several measures acted conjointly towards improving India’s food production, especially the new seed-fertilizer technology; but credit availability from banks was certainly an important one among them. The Green Revolution has been criticised on environmental grounds, which may be perfectly valid. But that is a separate issue altogether; the fact remains that it saved the country from the clutches of imperialism.

After economic “liberalisation”, institutional credit to agriculture, as is well-known, has dried up significantly. Priority sector norms remain; but not only are they flouted, but even the definition of “priority sector” has been so expanded that genuine credit to agriculture has become a meagre component of it. The foreign banks flout even these norms with impunity; and private sector banks follow them closely. Public sector banks, notwithstanding all the above caveats, are still the best performers in priority sector lending.

Enlarging the presence of foreign banks and corporate house banks at this juncture therefore is quite bizarre. The government has just enacted a Food Security legislation covering over two-thirds of the country’s population. If such a large segment of the population is to increase its food intake, then obviously there has to be an increase in food output in the country. Such an increase is inconceivable without a substantial increase in institutional credit to peasant agriculture. This needs a strict definition of priority sector lending, a firm directive to public sector banks to adhere to priority sector lending norms, and penalisation of those banks, especially foreign and private banks, which have systematically defaulted on priority sector lending even on its current loose definition. The fact that instead of doing this the government is actually encouraging the growth of precisely that sector within banking that does not care about priority sector lending, shows its lack of seriousness in implementing its own Food Security legislation. Quite obviously foreign banks for whom the red carpet is being unrolled, cannot be shown the door for not meeting priority sector lending norms once they have entered the country.

The changes being mooted in the banking sector in other words are so flagrantly in contradiction with what the Food Security legislation demands that one cannot help feeling that once the elections are over this legislation will be given a quiet burial. Already the legislation incorporates the possibility of cash payment in lieu of food; so, once the elections are over, the government will quietly shift to cash payments, and, with prices rising as at present, the real value of the cash transfers will be allowed to get eroded over time, quietly undermining this much-hyped measure which the neo-liberal wing of the government has been in any case coerced into accepting.

Another development points in the same direction. The government is making budgetary resources available to public sector banks on the basis of which they can give loans to make the purchase of private vehicles easier. This is supposed to be a measure to boost industrial demand in the economy and counter the slowdown that has occurred.

CLASS

BIAS

There are however two ways of boosting demand. One is via consumer credit. The other is via giving loans to producers in sectors such as agriculture, whose output, and hence demand for industrial goods, can thereby be boosted. The latter has the obvious “advantage” that even while boosting industrial demand, it adds to the nation’s food output and the purchasing power of large numbers of peasants and agricultural labourers. The fact that instead of following this latter course for expanding the home market, the government has followed the former, which is nothing else but the path followed by the American banks that created a credit bubble only for it to burst later to the detriment of the country’s financial system, is indicative of the utter class bias of the Manmohan Singh government. Giving easy credit for the purchase of vehicles is a direct boost to the markets and hence profits of the corporate sector that is engaged in producing such vehicles, while enlarging the domestic market via an expansion of agricultural output and the purchasing power of the masses is too roundabout a route for corporate capital.

These new directions in banking policy that privilege consumer credit over producer credit, that privilege the corporate-financial elite over peasant agriculture, that roll back the thrust of bank nationalisation and expose the economy to financial crises have got to be resisted with vigour in the interests of the nation.