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Banking Sector Reforms?

Thomas Franco
   Saturday 18 February, 2017  

The meaning of reform is improvement / reorganisation / restructuring / modification / transformation / alteration / change / development as per dictionary.  Reform should bring positive changes, reform should help the larger majority. But in the name of reform what are we doing? Between 1969 and 1991 the Public Sector Banks fulfilled the objectives of Nationalisation.  The number of rural branches increased, Credit–Deposit Ratio improved.  Small credits and agriculture credit increased and the economy as a whole improved.  From 8262 branches the network increased to 62000 out of which 58% in rural areas.  CD ratio reached 65% with rural branches reaching upto 97% in CD Ratio.  The so called BIMARU states had big expansion of Bank branches.  From 0.2%, the agriculture credit reached 18%, credit to SSI Units increased from 6.9% to 13.5%.  Between 1972 and 1983 there were 21.2 million additional Bank Loan A/cs of which 93.1% were with credit limit less than Rs.10000.  In 1983 RBI Reporting raised the limit for small borrowal accounts to Rs.25000.  Between 1983 and 1992 another 36.0 million additional loan accounts were added of which 95% were less than Rs.25000.  Reaching 62.5 million small borrowers was a historic achievement.  Then came the reforms in 1991.  Narasimham Committee 1 recommended removal of social objectives.  The recommendations were influenced by IMF & WB.  It argued that directed credit (Priority Sector) should be removed slowly.  Expansion of branches should depend on “need, business potential and financial viability”, it recommended.  It also wanted larger role to Private and Foreign Banks.  This was followed by Narasimham Committee- 2, Raghuram Rajan Committee, Anwarul Hoda Committee, Khandelwal Committee and then P.J. Nayak Committee.  The common recommendations were

  • Bringdown stake in Public Sector Banks to 33% or 40%
  • Merger and Acquisition in the name of consolidation
  • Liberal entry to Foreign Banks
  • Increase in FDI share in Private banks to 74%
  • Proportionate voting right to share holders
  • Provide new banking licences including to corproates
  • Phase out priority lending
  • Outsource Bank jobs
  • Promote Asset Reconstruction Companies
  • Reduce staff strength sharply
  • Performance based pay structure

Step by step, from Congress to NDA to UPA to UPA II to NDA Governments have speeded up this process except during the period of UPA I.

The big industries turned corporates who had been running banks before Nationalisation, want to own them again.  New Corporates like Reliance want to have a major share.  The experience of Mexico, Brazil, Greece and many other countries have shown how the Banking Sector has been taken over by Private Corporates and Foreign Banks over a period of time.  This has lead to the Banks shifting to only one motto, “Profit”. The deposits are of the common man and major credit portfolio goes to the benefits of the rich leading to increase in income inequality. The 2008 crisis of US Banks showed the weakness of Private Banks, many of them became bankrupt and the rest had to be saved by the Govt.

Our Constitution promises equal opportunity for all.  But in the name of reforms the majority of the weaker sections, marginalised sections and socially deprived sections are getting out of the Public Sector Banks and becoming dependent on money lenders including MFIs and NBFCs.

The latest Data released by RBI on 10th March 2016 as on March 2015 reveals the status.  The outstanding small credit less than Rs.25000 is just 0.5% of total credit.  Above Rs.25000 and below Rs.2 lakhs is 7.7%.  Above Rs.2 lakhs to Rs.5 lakhs is 7.7%.  Above Rs.5 lakhs up to Rs.10 lakhs is 4.3%.  Even if we take borrowers upto a credit limit of Rs.10 lakhs as small borrowers the percentage out of the total is 20.8% only.  If we take upto Rs.2 lakhs it is only 8.2%.  Interestingly outstanding credit from 1 Cr to 2.5 Cr constitutes 6.5%, Rs.2.5 Cr to Rs.10 Cr constitute 15.4% (31995 borrowers) and above Rs.10 crores constitutes 31.5% (11000 borrowers)

The NPA of the big borrowers is increasing rapidly and the Govt is not willing to declare wilful defaulters as criminals.  Mallaya is a creation of reforms.  There are many more.

Agriculture is in crisis; unemployment is increasing and small entrepreneurs are failing due to non availability of cheap credit.

The rural branches have come down to 38%.  Inspite of the failures of Private Banks licences are being given including for small Banks and Payment Banks.  To help payment Banks, cashless economy is being forced.  The main beneficiaries are Reliance, Airtel and Paytm.  How long they will survive is not known.

In the name of reforms there is an attempt to end bipartite settlements for wage revision at Industry Level and another attempt to divide and rule by bringing in Performance based variable pay.  When the branches do not have identical level playing field, how can you measure and compare performance?

These are the result of Banking Sector Reforms. Are we going the Greece way?

Before mass appraisal of people, the Government has to change direction and reorient Banking towards the larger majority and fulfil social objectives also. Former Chief Justice of India, Shri. Markandey Katju has said that there is going to be a revolution.  Can’t we have a bloodless revolution once again through policy changes?
* Thomas Franco (ngcfranco@gmail.com)


“Before you do anything, stop and recall the face of poorest most helpless destitute person you have seen and ask yourself, is that what I am about to do going to help him.”

– Mahatma Gandhi




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