Dr Ashwani Mahajan
After new RBI governor’s Raghu Rajan’s statement in Washington, that foreign banks would now get permission in a big way, a new debate has started in the country, especially in light to shaky past of European and USA’s banks. Questions are also being raised about why Raghu Rajan chose foreign soil to make this policy statement? A sensation has been created by the governor that RBI is going to announce a monetary policy soon, as a part of five pillars of economic reforms, which would make foreign banks to enter into India a big way; such that foreign banks would be allowed to take over Indian banks. In this regard policy announcement would be made soon in the next few weeks.
It is notable that for the last few years, government of India has been contemplating permission to large business houses to open commercial banks. Before 1969, except State Bank of India and its’ associate banks, the entire banking sector was in private hands. Then Indira Gandhi government nationalized 14 large banks. However foreign banks and those private banks, whose deposits were less than 50 crores were not brought under the ambit of nationalization. The thinking of the government was that nationalization of banks would help the economy to reach a high rate of development by encouraging equity and priority sectors. In 1980, six more big private banks were nationalized. By 1980, banking sector was almost monopolized by the nationalized banks.
After 1990
In the post economic reform era, many new private banks were started and other (including foreign banks) expanded their business. Whereas in 1990-91, hardly 14.6 percent of total bank deposits belonged to private and foreign banks; by 2011-12 they increased to 29 percent. ICICI, HDFC, Axis Bank etc. are now some big names in private sector banks. However, business and profits of public sector banks have also increased impressively.
One of the major arguments behind the nationalization of the banks was that most of the private banks belonged to the business houses, which used to play with the public money 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 made 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 increased further during the period of liberalization. It is to be noted that in 2011-12, the profits of public sector banks were around rupees 50 thousand crore. Even during 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 business houses to open new banks. But the Reserve Bank of India was in no mood to oblige him. The Reserve Bank has been of the opinion that if business 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 be deprived of the same. This opinion of the Reserve Bank seems correct to some extent. Banks run by business houses were nationalized 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 business houses were not given permission to open banks. In 2001, the Reserve Bank once again issued fresh guidelines 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 business 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.
Raghu Rajan and Reserve Bank’s Thinking
After Raghu Rajan taking over as governor of RBI, from the statements coming from its official, it seems that roads are now being cleared for issuance of licenses to not only the business houses, but even foreign banks. Although Parliamentary Standing Committee has raised strong apprehensions about such a move, RBI officials have been arguing that in face of strict banking laws, business houses would not be able to manipulate resources in their favour. Though new RBI governor has kept silence over the issue, but it is being felt that RBI has more or less made up its mind in favour of issuance of banking licenses to the business houses.
When Government of India was trying to rope in business houses into banking sector, along with RBI, International Monetary Fund (IMF) had also raised serious objections. In its recent report IMF has warned that allowing business houses in banking business may disturb the banking system in the country. IMF has also said that gains from such policy would be far fewer than the disadvantages arising out of the same.
Foreign Banks are Even More Dangerous
At present though foreign banks are allowed to operate in India, however to open a new branch, a bank of foreign origin has to take permission from RBI. RBI generally gives its permission on the reciprocity basis, such that Indian banks would also be allowed to open their branches abroad. At present 43 foreign banks are operating with 334 branches out of which Hong Kong’s HSBC, UK’s Standard Chartered Bank, USA’s Citi Bank, Netherland’s Royal Bank of Scotland are some major ones. These banks have captured accounts of big business and rich people. Business, as well as profit of these banks has been rising consistently. Although foreign banks run their business in India, similar to that of Indian banks, however, due to their foreign origin, their transactions with their foreign entities are sometimes non transparent. According to a report, recently RBI has raised concerns about currency speculation, especially involving foreign banks and have shown its complete helplessness to control such speculative transactions, which take place outside the domestic territory, but having bearing on banking transactions in India. RBI has very bluntly stated that it has virtually has no command to regulate such transactions.
Although according to Raghu Rajan’s recent statement, foreign banks would be allowed to open branches on reciprocity basis; that is, Indian banks would also be allowed to open their branches abroad. But Raghu Rajan’s statement that now foreign banks could take-over Indian banks, indicates at looming dangers on Indian banking system. It is an open recreate that banks abroad, especially European and American banks are going bankrupt, losing confidence of the people. Our Prime Minister has also been saying very proudly that Indian banking systems is one of the safest banking system and is insulated from the global financial upheavals. And now Raghu Rajan’s present endeavor to allow foreign banks to take over Indian banks, may create dangers to the existence of the ‘safe’ Indian banking system. And more disturbing is the fact that Raghu Rajan, instead of allowing public debate on such an important and sometime issue having far reaching consequences, chose foreign soil, to make this announcement.
Trending Now
E-Paper
Follow our WhatsApp channel