It will harm poor, down trodden and farmers
Out of his zeal to alter every institution he inherited and to implement the policy of laissez faire thus turning socialist democratic republic of India into a corporate managed economy Prime Minister Narendra Modi is either privatizing every PSU including railways or disinvesting them by selling government shares. His government’s latest target is going to be public sector banks which were nationalized by Indira Gandhi in early seventies. The main purpose of nationalizing the banks was to make their services available to poor and have nots of this country. For about half century the banking sector almost served this purpose and strengthened Indian economy. The Indian economy was able to face the recession of 2008-11 when even American economy was at the verge of collapse due to these public sector units including banks. Though the policy of disinvestment is not new and surely was not invented by Modi government but he has accelerated the process and is privatising the core sectors like railways, insurance ,oil companies coal etc. little realizing that in a country like India where even today one third of our population is living below poverty line this segment of our society could not be left at the mercy of market forces.
In this series of privatization the latest target are banks. Sensing the mood of the Modi government the internal working group of Reserve Bank of India has recommended to allow large corporate houses to promote their own banks. The proposal is being widely criticized not only by political parties but by financial and banking experts also. They are citing several problems connected lending in a context of weak supervision additional stress on an already weak supervisory system in a crisis further concentration of economic power in large corporate houses delayed bankruptcy recognition and resolution of related parties. These arguments are well known and even RBI is aware of them still there is shift in its stand. Opposition parties alleges that this is due to crony capitalism. They blame that the Modi government is helping its corporate friends through a submissive RBI. In the backdrop of crisis in banking sector can some challenges be mitigated by corporate entry in this sector? This is the major question being asked by a common man. Does India needs more and larger private banks and should some large public sector banks needs to be privatized ? Corporate entry may help with resolution of failed banks and creation of more banks. But the major question is that how the banks and that too public sector banks have started failing recently what has ailed our banking sectors and why this could not be treated and banks could be made as successful as they were till few years ago. Will the corporate houses not game the system to inordinately benefit themselves, while creating problems for financial stability and consumer protection. If corporate houses could successfully run the banks why not the government is the big question being asked by a common Indian. The net result of privatizing core sectors had not been very enthusiastic then why the government instead of improving the functioning and making them viable is giving them in private hands and to allow the loot and exploitation of people mainly poors. The failure of Tejas train within months is the burning example that private sector and privatization is not the sole key of success.
The report of RBI’s internal working group does not sound particularly convincing while making the case for corporate entry into banking sector. It is also not clear why this recommendation is being made at a time when the banking and financial sector is passing through very tough time. The report tries to justify its recommendation which is given all the times when any PSU is to be privatized and that is private sector’s so called expertise, professionalism and corruption free working. RBI’s internal working group recommendation also pleads that it can be an important source of capital. One possibility is that the recommendations may have been prompted by the need of the government to sell some public sectors banks. Allowing big corporate houses to bid for major public sector banks might deepen the pool of potential buyers. But transferring the banks from one bad owner to another makes little sense for the stability of the overall banking sector. However, the group acknowledges many worries of corporate sector banks mainly moral hazard, concentration of economic power in few hands, misallocation of credit and conflict of interests. It has suggested changes in banking regulation act to overcome these problems. But the fact remains that the banking history had many examples of corporate ownership of banks that has created a lot of problems. Nationalization of banks by Mrs. Indira Gadhi’s government was not just miscalculated adventure rather it was a well thought out decision and that gave good fruits. After implementation of new economic policy in 1991 when banking licences were given to private owners the RBI itself discouraged big corporate houses from applying for these licences. Former RBI governor Raghuram Rajan and deputy governor Viral Acharya have also said that corporate ownership of banks in the past has not given any good result. The history of such connected lending is invariably disastrous. The ultimate sufferers of this misadventure by Modi government will be poor and downtrodden section of our society including farmers.
The idea of corporate banking in a country like India is bad enough. The corporate houses here are not tightly enough regulated to own banks is a bad idea no matter how many safeguards are put in place.