Dr Ashwani Mahajan
There has been a debate for the last few months over the permission given by the government to industrial houses to open banks. Significantly, before 1969, the entire banking business was in private hands except the State Bank of India and its associate banks. In July 1969, the Indira Gandhi government nationalized 14 large banks. Foreign banks and other such banks whose deposited money was less than 50 crore rupees were not brought under the nationalization division. The Government of India was of the opinion that nationalized banks would assist in bringing mobility in the economy and would accelerate the rate of economic development. Six more commercial banks were nationalized in April 1980. Since then, government-sector banks dominated the banking sector to a large extent.
After 1990, with the liberalization of the economic policies, some large new private banks came into existence and their business is growing continually. In 1990-91, foreign and private banks had only 14.6 of the total banking deposits, however, by 2011-12, their contribution increased to 29 per cent of the same. ICICI, HDFC, IDBI, Axis etc.are now big names in the banking sector. The business, i.e. the profits as well as the number of branches, of the government banks has also increased in the meanwhile.
One of the major arguments behind the nationalization of banks was that most of the private banks belonged to the industrial houses who played with the money deposited by the public for the expansion of their business. Credit is extremely important for fulfilling the developmental needs of the country. After the nationalization of banks, many rules were implemented under which the banks were asked to give at least 40 per cent loans for priority sectors, namely, agriculture, small scale business, exports, education etc. They were also directed to open branches in rural areas and lend to extremely poor, unemployed and other deprived sections. These public sector banks were also earning a good amount of profit. These profits further increased during the period of liberalization. It is to be noted that in 2010-11, the profits of public sector banks were around rupees 50 thousand crores. Not only this, during the period of global recession, when private banks like ICICI Banks were neck deep into trouble, the business, profitability and growth of public sector banks continued unabated.
Attempts of Finance Minister
Finance Minister, P. Chidambaram has been making efforts for a long time to pave way for granting permission to industrial houses to open banks. But the Reserve Bank of India, is in no mood to oblige him. On one hand, the Finance Minister is not only advocating for grant of banking license to industrial houses, he has also been consistently making efforts for the same, on the other hand, the Reserve Bank of India does not seem enthusiastic to go a step further in this direction. The Reserve Bank is of the opinion that if industrial houses are given licenses to open banks, they would misuse people’s money to expand their business. In this scenario, people who deserve loans, would not be able to get the same. This opinion of the Reserve Bank seems correct to some extent. Banks run by Industrial houses were nationalised for this reason only. Though the RBI did give limited permission for the opening of private banks in 1993, but at this time too, big industrial houses were not given permission to open banks. In 2001, the Reserve Bank once again issued fresh guidlines to open private banks and made it clear that industrial houses cannot open banks. But now, there is pressure on the Reserve Bank to allow industrial houses to open banks. For this, it has been given a rationale that industrial families have deep pockets, and thus, they would be able to invest more on technology and expansion of bank which would assist in the development of banking services in the country, especially in rural areas.
Protest by the Reserve Bank
The Reserve Bank believes that it would not possible for RBI to regulate these banks, because of modus operandi of industrial houses. In such a scenario, these banks may fail as well. Though there are only a few examples of failures of banks in India, but present day speculative activities in which private banks and other financial institutions operate and the current market scenario may put the existence of these banks at stake. Recently, the Finance Minister has taken some decisions which may increase the power of the Reserve Bank with regard to the regulation of banks. A Bill to this effect is expected in the parliament for making amendments in banking rules and regulations. Earlier, there was a provision in private sector Bill to allow banks to work in Futures and Options in the stock market. However, P. Chidambaram seems ready to remove it from the Bill. Till now, the Reserve Bank has only the right to remove a Director or any other officer of any bank. However, now the Reserve Bank will get the right to remove all the Directors of any bank and hand over the working of the bank to any of its selected official. The Reserve Bank would also be given the right to investigate into the business of the associate companies of bank’s promoters.
The apprehensions of the I.M.F.
Not only the Reserve Bank, International Monetary Fund (I.M.F.) is also apprehensive of these efforts of the Government of India. In its recent report, I.M.F. has said that granting the license to industrial houses to open banks may disturb the banking system in India. I.M.F. has also forewarned India that if industrial houses are given this permission, the consequent benefits of this change would be much more than its benefits. I.M.F. has also said that India needs to put in place a detailed guidelines, before it grants this permission. Presently, India is far behind in the regulation of the private banks. This warning is really important in the context of government’s advocacy to allow industrial houses to open banks. I.M.F. also said that international experiences also suggests that industrial houses should not be given banking license. Experts believe that the top officers of these banks would work to increase the benefits of friends and associates of industrial houses. However, the ministry of finance has been maintaining that they would ensure such a regulatory system that industrial houses would not be able to take any undue benefits.
Trending Now
E-Paper
Follow our WhatsApp channel