Don’t Allow Business Houses to Run Banks

September 4, 2011

 

The Polit Bureau of the Communist Party of India (Marxist) has issued the following statement:

 

The UPA government has decided to allow corporates to set-up banks. By this, the policy of bank nationalization undertaken by the Indira Gandhi government in 1969 will stand completely overturned.  In the light of the global financial crisis sparked off in 2008 by the profligacy of banks and financial speculation, this is an irrational decision.

 

The Finance Minister had made an announcement regarding new bank licenses for private players in his 2010 budget speech. Following up on that announcement the Reserve Bank of India has released Draft Guidelines for Licensing of New Banks in the Private Sector on August 29, 2011, which makes industrial and big business houses eligible for opening new banks.

Prior to bank nationalization, the big business houses of India used their control over banks to divert bulk of the bank advances to large and medium-scale industries. Bank nationalization had helped in the expansion of bank branches in the rural and semi-urban areas and ensured credit flow to the priority sectors, i.e. agriculture, small-scale industries and exports. Even when licenses to private banks were issued in the post-liberalization period (in 1993 and 2001), big business houses were prohibited from getting licenses. The UPA-II government wants to abandon this long-standing policy.

Allowing industrial houses to own banks would allow them to corner bulk of the credit for their own businesses through connected lending. It will be impossible to assess risks and regulate the banking sector in such a scenario. Moreover, it will further the concentration of financial power and political influence. It is for these reasons that many countries, including the United States, prohibit industrial houses from operating banks. South Korea prohibited industrial houses from promoting new banks following the financial crisis in 1997.

 

Banks run by big business houses will increase the scope for large-scale financial malpractices. The recent scams involving big business highlight the danger of financial swindles in such banks that will deprive the people who deposit in such banks of their hard-earned savings. 

 

The public sector banks have the best record as far as meeting priority sector lending norms and branch expansion in rural and semi-urban areas are concerned. 67 per cent of bank branches of the SBI are located in the rural and semi-urban areas. Moreover, the SBI currently has reserves amounting to nearly Rs. 65000 crore. The other public sector banks also have high reserves. This huge capital lying with the public sector banks can be used to expand bank branches and ensure financial inclusion.

The draft RBI guidelines also allow initial foreign shareholding in the new private banks upto 49 per cent, which can be increased to 74 per cent after five years. This will open the way for the entry of more foreign banks into India. Many of these foreign banks have been responsible for highly imprudent and speculative practices which led to the financial crisis in 2008. In contrast, the Indian banking sector – dominated by the public sector banks – has robustly withstood the global financial crisis. Despite this experience, the government is trying to open up the banking sector and seeking to amend the provision of the Banking Regulation Act which caps voting rights in the bank boards at 10 per cent. The CPI (M) strongly opposes these moves.