BANK EMPLOYEES FEDERATION OF INDIA – TAMILNADU
(State unit of BEFI) 27, V V Koil Street, Vellala Teynampet, Chennai -600086
The Principal Chief General Manager, 29.09.2013
Reserve Bank of India,
Mumbai
Dear Sir/Madam,
This is in response to the discussion paper on ‘Banking Structure in India-The Way Forward’ released by RBI on 27th August 2013.
1. We strongly oppose Corporate Licencing to open Banks.
The Public Sector Banks (PSBs) have been doing very well in every parameter. There is absolutely no need for new banks to be opened in Private Sector.
The performance of the Private Sector Banks has been dismally poor. More than 550 Banks became bankrupt between 1947, the year of Independence and 1969, the year when 14 Major Private Banks were nationalised. Even after Nationalisation, more than 25 Private Banks became bankrupt and merged with the PSBs including the Global Trust Bank (GTB) that came into existence as a result of RBI policy of 1993. The huge loss amounting to more than Rs.1000 crores incurred by GTB was forced to be borne by Oriental Bank of Commerce, a Public Sector Bank.
In March 1965 when the share of agriculture and allied sectors in GDP stood at 44%, the share of scheduled bank advances was a negligible 0.2%. There could not be more stark evidence of exclusion. This is one of the primary reasons why Private Banks were nationalised.
The discussion paper of RBI released on 11.08.2010 quotes as under:
“Prior to nationalisation of major commercial banks in 1969, the industrial and business houses, having control of the banks, diverted bulk of the bank advances to industry, particularly to large and medium-scale industries and big and established business houses, while the needs of vital sectors like small-scale industry, agriculture and exports were neglected. The main objective of nationalisation of commercial banks was to make a shift in the focus of the banking from class banking to mass banking and provide a thrust to branch expansion in the rural and semi-urban areas as also stepping up of lending to the so called priority sectors”
“The experience of the Reserve Bank over these 17 years has been that banks promoted by individuals, though banking professionals, either failed or merged with other banks or had muted growth”
“There are several deep rooted fears in allowing industrial and business houses to own banks. Mainly these relate to the fact that such an affiliation tends to undermine the independence and neutrality of banks as arbiters of the allocation of credit to the real sectors of the economy. Conflicts of interest, concentration of economic power, likely political affiliations, potential for regulatory capture, governance and safety net issues are the main concerns. The Japanese experience with Keiretsu, the Korean experience with Chaebols and Indian experience prior to Nationalisation are strong reminders of the pitfalls of commercial interests promoting/ controlling banks.”
“Preventing industrial and business houses to promote banks would automatically eliminate any conflicts of interest situations as well as situations similar to the pre 1969, when banking was monopolised in the hands of few individuals and where banks’ funds were used for connected lending.”
“Allowing industrial and business houses to promote banks creates conflicts of interest through self -dealing at the expense of bank clients. Conflicts of interest could also arise from transactions between the bank and its affiliates. A bank affiliated to a commercial firm may deny loans to its affiliates’ competitors, and instead favour its commercial affiliates in granting loans on preferential terms….”
“In the absence of statutory provisions that impose strong penalties for violations, dealing very strongly with conflict of interest situations and connected lending as available in Hongkong where the violations of provisions would lead to penalty and imprisonment, allowing industrial/business houses to set up banks and allowing them access to banks’ funds may be risky.”
“Linking banking with commercial activities may tend to undermine the neutrality and independence of banks in deciding allocation of credit to the real sectors of the economy. Such distortion in allocation of credit may have substantial adverse effect on the overall productivity of the economy.”
“The industrial and business houses may not be committed to attaining broader objectives of financial development particularly ensuring financial inclusion and providing services to all sections of society.”
When this is the conclusive observation of RBI, the proposal to allow corporate sector to open up Banks is quite contradictory. This is clearly an attempt to reverse the gains of Nationalisation and convert the path of the banking industry from mass banking to class banking.
The suggestion put forth by the discussion paper dt. 27.08.2013 is that “there is a case for reviewing the present ‘stop and go’ or ‘block’ bank licencing policy…..and considering ‘continuous authorisation’ of new banks. Such entry would increase the level of competition…..”
If the real idea is to improve the competition, then why is consolidation of PSBs suggested in other chapter? What is the motive of RBI- consolidation or competition? When even ‘stop and go’ bank licencing policy of allowing corporates to open banks once in ten years itself proves to be retrograde and inimical to the interest of the banking clients and the common man, continuous authorisation will put the nation’s interest in peril.
We draw your attention to the views of the Parliamentary Standing Committee on Finance, headed by former finance minister Shri Yashwant Sinha opposing bank licences to corporate houses. According to the newspaper reports the members of the Committee felt that since there was no such practice to give bank licences to corporate houses anywhere in the world, India should not be an exception.
Therefore we urge upon you to stop banking licence to corporate business houses.
2. We oppose reduction of Government holding in PSBs to below 51%
The RBI discussion paper dt.27.08.2013 reads as under:
“The predominance of Government owned banks in India has contributed to financial stability in the country. Experience has shown that even deterioration in bank financials does not lead to erosion of consumer confidence in such banks. This kind of consumer confidence does not extend to private sector banks.”
“Further, as demonstrated in the recent global financial crisis, public-ownership has positive implications for financial stability as deposits migrated from the private sector banks to public sector banks. Thus, even at the height of the recent global financial crisis, retails deposits in India did not desert banks. This was in contrast to the banks in advanced economies where there was a liquidity crisis due to deposit run, as a result of which there was a need for blanket extension of deposit insurance across Europe……..”
From the above it is very clear that PSBs enjoy abundant confidence of the people. Then what is the necessity to reduce Government holding in PSBs to less than 51% and hand over the control to private sector?
It is said in the report that “ … as per RBI calculations, the amount of additional capital required to be infused by the Government in the wake of adoption of Basel III framework is Rs.900 billion over a period of 5 years, if the Government opts to maintain its shareholding at the current level. Clearly, providing equity capital of this size in the face of fiscal constraints poses significant challenges….”
We raise three questions to counter this statement.
1. When the Basel norms are voluntary and when confidence of the common man in the PSBs is abundant irrespective of the Capital, why did our country choose to adopt the same?
2. When some of the advanced countries are still in the process of adoption of Basel II norms, why should India be in a hurry to go for Basel III norms?
3. 50% of NPAs in Banks is from the Corporate Sector. If stringent measures are taken, that can be recovered. The total revenue foregone under the heads of corporate income tax, customs duty and excise duty in the successive Budgets of the Central Government from the year 2004-05 to 2012-13 work out to more than Rs.31 lakh crores. Assuming that Basel III norms are to be adopted, can equity capital to PSBs not be provided if this kind of drainage of income to the Government exchequer is stopped?
Therefore it is a specious argument that since huge capital is required to be provided to the PSBs, they can be privatised by reducing the Government holding from 51% to 33% to reduce the burden to the Government exchequer.
Private Banks do not comply with the guidelines of RBI with regard to priority sector lending, minimum stipulation of 25% of the branches to be opened in the rural and unbanked areas. They do not take any step with regard to financial inclusion. Therefore privatisation of PSBs will defeat the very purpose and objective of nationalisation apart from defeating the present goals of the Central Government/RBI regarding financial inclusion. We urge upon you to give up the move of privatising PSBs.
3 We oppose consolidation of PSBs
There is an argument advanced to support the case of consolidation of PSBs: Merger of PSBs would enable Indian Banks to compete globally; the largest Bank in India namely State Bank of India itself ranks only in the 38thposition globally based on the size of assets as per the global league table for 2013 and therefore merger of PSBs would enable Indian Banks to compete globally.
The hard reality is like this-the total asset of all the PSBs as of last year was approximately 1200 billon USD whereas the asset of Barclays Bank, UK was 1592 billion USD, UBS,Switzerland was 1568 billion USD, Misubishi, Japan was 1509 billion USD, HSBC, UK was 1502 billion USD, Citi Bank, USA was 1494 billion USD. Where is the question of global competition?
The RBI report dt.27.08.13 itself admits that consolidation will result in rationalisation of branch network which may lead to closure of branches and redeployment of staff and consolidated bank may rather cater to big ticket business, in the process adversely affecting financial inclusion.
The same report says “There is empirical evidence (Dymski-1999) that one consequence of the merger wave in US banking in 1990s has been that loan approvals for racial minorities and low income applicants have fallen and the extent of this decline was more severe for large banks”
The report further says “Consolidation could also result in less competition…. and arbitrary pricing of products”
Our country has nearly 6,32,000 villages as per 2011 census, whereas the number of rural bank branches is only 23776 as of 2012. More than 95% of the villages do not have bank branches. Do we need consolidation or expansion of PSBs?
This report itself admits that 42.9% of the rural credit is financed by Non-institutional agencies like landlords, money lenders, traders, commission agents etc. Do we need consolidation or expansion of PSBs?
The report itself admits that despite significant progress just about 40% of the adults have formal bank accounts.Do we need consolidation or expansion of PSBs?
The report itself admits that ”Based on data given in Basic Statistical Returns, it is estimated that rural India had only 7 branches per 1,00,000 adults in 2011 in sharp contrast with most of the developed and even BRICS economies having over 40 branches.” Do we need consolidation or expansion of PSBs?
It is acknowledged fact that nearly 2.5 lakhs of farmers committed suicide in our country mainly for want of institutional credit at low interest rate and long repayment period. Do we need consolidation or expansion of PSBs?
We strongly urge upon you to give up consolidation of PSBs and go for their expansion.
4. We oppose conversion of Urban Co-operative Banks into commercial private Banks
For the same reason advanced by us against the private banks we oppose conversion of Urban Co-operative Banks into commercial private banks/local area banks.
5. We oppose presence of Foreign Banks in India
The RBI report dated 27.08.2013 says “ The significance and need for foreign banks’ participation in India arises primarily to increase competition, promote efficiency of the local banking system and also to bring in sophisticated financial services and risk management methodologies which can be adopted by domestic banks.”
We draw your attention to the report of RBI with regard to complaints of banking clients received by Ombudsman as on 31.03.2012 which says that per branch complaint of PSBs is 0.69, whereas that of New Private Banks is 2.35 and that of Foreign Banks is 22.34. From this it can very well be concluded that the performance of PSBs is far superior to that of New Private Banks or Foreign Banks.
Therefore we urge upon you to give up the attempt to increase the presence of Foreign Banks in India.
From the above we are of the considered view that all the Private Banks should be nationalised. The Government of India should fully own the PSBs. There is an urgent need to expand PSBs. The control of RBI should be strengthened. The focus should be mass banking with service as the predominant objective.
Regards,
Yours faithfully,
(C P KRISHNAN)
General Secretary
Inconvenient figures have been whitewashed from the coverage ofNelson Mandela's death.
