Once Again, India's Banks Are The Fiefdom Of The Rich

In its official history, the Reserve Bank of India describes Indira Gandhi's 1969 decision to nationalize major banks as "without doubt, the single most important decision taken by any government since 1947. Not even the reforms of 1991 are comparable in their consequences - political, social and, of course, economic." (Cited by Niranjan Rajadhyaksha, After bank nationalization, Café Economics, 14 July 2009).

Why was this decisive measure taken? Indira Gandhi, in her historic Rajya Sabha statement on 21 July 1969, said it was in pursuit of "the goal of a socialist pattern of society" that parliament had approved some 15 years earlier, under which "the control of the commanding heights of the national economy (is) particularly necessary in a poor country which seeks to achieve speedy economic progress, consistent with social justice, in a democratic political system." Her aim, she said, was to free the system "from the domination of a few" and open it to opportunities for all "by severing the link between the major banks and the bigger industrial groups which have so far controlled them." She added, "that the operations of the banking system should be informed by a larger social purpose" such as meeting the credit needs, in particular, "of farmers, small-scale industrialists and self-employed professional groups" and "create fresh opportunities for hitherto neglected and backward areas and rural development generally".

At one level, nationalization has been spectacularly successful. The number of rural branches has risen from "8261 in 1969 to a whopping 65,521 in 2000" (Samar Srivastava, Forbes India) and is close to 70,000 now; it has proved possible to set ambitious targets for agricultural credit (even if performance usually falls short of targets and increasingly goes to plantation owners and super-rich food processors and mass retailers); loan waivers have been made possible in times of agrarian distress; there has been an enormous increase in financial inclusion; the entire Direct Benefits Transfer scheme has been rendered possible only because of our nationalized banking network.

But if the banking system is in grave trouble today, it is principally because economic policy has moved dramatically away from the "socialist pattern" in the direction of handing back the "commanding heights of the economy" to the private sector (especially heavy industry like steel and infrastructure through PPPs).

The principal instrument for this transfer of responsibility has been the nationalized banks, thus robbing them of the rationale for nationalizing them in the first instance. Indeed, while Public Sector Banks (PSBs) have been burdened with enabling the private sector to recapture the levers of our economy, private banks, including private foreign banks, have scrupulously kept themselves away from joining in the exercise. The official Economic Survey (2014-15) put it succinctly: "an anomalous case of private sector growth without private sector bank financing".

Private banking knows that the growth figures being trotted out by the government are a dangerous illusion. PSBs, alas, do not have the privilege of making up their own minds. They neglect due diligence because they are obliged to echo their Masters' Voice. They have to accept, not question, the government's assessment of growth and potential.

They cannot question, as Mohan Guruswamy does (in the Deccan Chronicle), the curious delusion that at 7.4% real GDP growth, we are the fastest-growing large economy in the world. In fact, our nominal growth (that is growth at current prices) in 2015-2016 has been the lowest in years at 5.2% (all of 6.35% below the Finance Minister's projection in his 2015 budget); but because collapsing oil prices and falling commodity prices have given us deflation of 2.2%, the real GDP growth appears to be 7.4% (that is, 5.2% nominal growth plus 2.2% deflation). Usually, inflation causes "real" growth to be discounted to a figure lower than the "nominal" rate. This year's deflation has reversed the process. So while Modi and his government boast of unprecedented prosperity (achche din etc), private sector banks back off because they know that most manufacturing sectors  (especially steel, the backbone of any economy) are in deep gloom, and that infrastructure, in particular, is stressed as never before. Hence, steel and infrastructure have been estimated by RBI's Financial Stability Report in December 2014 to have contributed 40% to stressed banking assets (probably nearer half by now).

PSBs also know this - but if they were to come down hard on non-performing borrowers, who are, for the most part, the biggest industrial houses, it will only lead to further economic decline. Therefore, the merry spree of PSB "restructuring assets" and "writing off" bad loans goes on even as Non-Performing Assets (NPAs) continue to soar. While The Indian Express, has famously estimated assets written off at a staggering, Rs 1.14 lakh crore, The Multiplier, calculates that total recognized NPAs are higher than the combined budgets of the four highest-spending ministries: Defence, Health, Human Resource Development, Rural Development - and higher than Sri Lanka's GDP!

If PSBs were to tailor their lending and loan recovery policies to ground realities, as private banks are doing, the government's mirage of growth would stand exposed and the government would probably fall. In any case, whatever temporary relief the government is securing by harnessing PSBs to their cause by promising Rs 70,000 crore over four years in recapitalization, Prof. Ram Mohan estimates that at least double that amount would be needed to rescue PSBs from the financial quagmire that is sucking them in. That would send for a six Jaitley's plans of fiscal consolidation.

Such is the outcome of perverting Indiraji's purpose in nationalizing major banks by making them once again the handmaiden of large enterprises. Former Deputy Governor, RBI, KC Chakraborty, puts his finger on the sad truth when he tells The Indian Express, "Small loans are rarely written off". 47 years after bank nationalization, banks are back to being the fiefdom of the rich.

PSBs are not incompetent. They have been rendered incompetent by being obliged to carry out the government's policies of big business prioritization. Where Indiraji wanted to free major banks from "the bigger industrial groups", economic policy is now designed to restore these bigger industrial groups to their earlier pre-eminence. Effective control over our PSBs has thus been returned to large industrial groups. Rajeev Chandrasekhar, MP, has estimated that close to 95% or more of stressed assets are held by just ten top industrial groups.

Nehru's "socialistic pattern of society" differed from "socialism" per se essentially in that agriculture was not collectivized and almost all of domestic private industry, such as it was (Tata, Birla, Dalmia), was left in private Indian hands. Nehru's nationalization was limited to infrastructure companies, particularly the railways, the airways and utilities (and later life insurance because of widespread fraud in private insurance companies). British-owned firms were nationalized only to the extent that the earlier foreign owners decided to depart behind the Imperial flag. For spearheading heavy industry, Nehru entrusted this to newly established state enterprises, often with government-to-government foreign aid and partnership, principally because the private sector did not have the resources to be able to undertake these massive heavy investment, long-gestation, low-return projects on its own. Not only finances, the private sector also lacked the technological expertise and managerial experience to venture out on the scale required, and, in any case, was wary of correcting regional imbalance by investing in remote areas.

This continues to be the case - with the difference that government, through the PSBs, is enabling the private sector, particularly the giant players, and especially those in infrastructure, to cock their snook at prudential banking and take PSBs for a long ride. That is why total stressed assets have risen over the last four years from 10.5% to 10.9% and 11.7% to an estimated 14.1% in the financial year just ended.

Nehru's and Indira's considerations were put aside, and even denigrated, when times changed and "socialism" became a dirty word. It came to be believed that only private sector-led growth would enable the Indian economy to catch up with and then overtake the best in the world. Moreover, the Private-Public Partnership model was mooted as the optimum route to unprecedented infrastructure development.

This change of track lies at the root of the banking crisis. For the looming financial instability with which the nation is threatened is the end-result of the owners of our PSBs, namely, the government of India, signalling to the PSBs that they might underplay prudential norms to ensure that private sector giants are enabled to restore their previous dominance over the economy, especially through PPPs in infrastructure. As P Vaidyanathan Iyer colourfully put it in The Indian Express, "some fat cats have had no skin in the game - put little equity and take large loans"!

Or in the more circumspect language of Prof TT Ram Mohan of IIM, Ahmedabad, (The Wire) "in retrospect, it is clear that government should not have ceded its role in infrastructure to the extent it did". He adds, "dismantling India's development financing institutions which had focused on long-term financing was a mistake" for it led to "saddling banks with long-term funding" instead of short-term financing which is their forte - a policy that is "inherently flawed".

Does your humble columnist need to say more?

(Mani Shankar Aiyar is former Congress MP, Rajya Sabha.)

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