Volume 2, No. 2, February 2001

Having struck the last nail in the coffin of the Public Sector Banks (PSBs), the government is all set to bury them. Following IMF instructions, the Bill for the privatisation of banks was passed in the winter session of the Lok Sabha. The Banking Companies (Acquisition and Transfer of Undertaking) and Financial Institution Laws (Amendment) Bill 2000, was passed in the Lok Sabha by 209 votes to 159. The Bill provides for the drastic reduction in government equity (shares) in PSBs to a mere 33% from the existing "not less than 51%".

Major foreign banks have been hovering over these PSBs like vultures, waiting to swoop in for the kill. Banks like the HSBC (Hongkong and Shanghai Corp. Bank), Standard Chartered and Citibank have openly expressed their intentions of acquiring Indian banks "when the laws of the land permit." This is quite natural, as these PSBs, with insignificant equity capital, hold gigantic deposits of the public. So, with a small amount of funds, these TNCs can grab control of the huge savings of the Indian public.

The immediate fallout is the government instruction for the removal of over 10% of the employees. It is estimated that by March 31, 2001, roughly 12% of the 9 lakh employees will accept the VRS (Voluntary Retirement Scheme) package and leave — i.e., an employee reduction of 1½ lakhs !!

The government claim that it will retain control even after dilution of equity to 33%, just because it will retain the power to appoint the CMD (Chairman cum Managing Director), is an outright hoax. In the new establishment out of 15 directors on the board, 10 will be from the private sector. The CMD will therefore remain a mere puppet in the hands of this brute majority. So, after gaining control of these PSBs, with a few crore investment, they will take control of their vast deposits.

The chart, of a few PSBs, in the next column, shows how lucrative this purchase will be.

So, to take an example of the Bank of Baroda. Assuming the government at present owns 60% of the equity, if this is to be reduced to 33% through dilution of capital, it would mean an infusion of an additional Rs. 182 crores. So any big business house or TNC by investing barely Rs. 100 to Rs. 150 crore can gain control of the huge deposits of Rs. 51,306 crores. Besides, in the year 2000 market capitalisation of these PSBs have dropped drastically — by as much as 30% to 45%. In other words the banks can be taken-over at even lower rates.

In the first instance, those that are likely to take control of the PSBs are those big business houses which owe the banks massive debts, euphemistically called non-performing assets (NPAs). Once they take-over the banks, with their majority on the board of directors, they can write-off these loans as bad debts. The amount entailed is a gigantic Rs. 1 lakh crores (The official figure is Rs. 58,554 crores, but this does not include the accrued interest), of which it is estimated that one-third is owed by 15 big-business houses. Attempts to get the defaulters names public has been so far suppressed by a secrecy clause stipulated in the RBI Act, 1934.

Once these NPAs are written off and the banks ‘restructured’ through big pay-offs in the VRS scheme, they become ideal prey for the TNCs who will gobble them up through so-called "strategic partnerships." Imperial Bank, with any other name will stink as much.

But why have banks in Indian turned a full circle from the British Imperial Bank of the colonial period, to the SBI of post-1947 India, to the nationalised banks of the 1970s and 1980s, and now to the move towards private banking in the 1990s and its transfer back to imperialist control in the new century ?

To take a brief look at this cycle of change :

Like the fake independence, the Imperial Bank, merely changed its name to the State Bank of India (SBI), by the State Bank of India Act 1952. In 1953 the Palai Central Bank collapsed. A similar fate faced most of the banks run by the erstwhile maharajas, due to the large funds siphoned off. To save these banks from default and to bail out the maharajas, 10 banks belonging to the princely states were taken over by the SBI in 1956 — these included the State Banks of Patiala, Saurashtra, Bikaneer, Jaipur, Indore, Baroda, Mysore, Hyderabad, Travancore .... and a number of smaller ones like Sangli, Manipur, Mayurbanj, etc.

In the late 1950s the government appointed the Mahalanobis Committee to look into the precarious conditions of the private banks. The Report, besides handing out the standard formulae to reduce flab, trim size, etc., it suggested the amalgamation of the less profit-making banks with the others. This resulted in the number of banks being reduced from 605 in 1950; to 423 in 1956; to 292 in 1961, to 102 in 1966.... and on the eve of nationalisation in 1969, to just 86.

Most of these banks that had existed were the offshoots of local landlords/Maharajas or big traders and moneylenders who sought to extend the scope of their financial activities. Most were in a state of collapse, due to irregularities and the take-overs by the SBI and mergers saved them from default of depositor’s monies. Besides, in the new scenario, after 1947, the comprador big bourgeoisie who became the dominating partner in the ruling class alliance, could not allow the fiscal anarchy / profligacy of the moneylender/landlord/trader combine and had to bring system into finance and banking to tap resources to the maximum. That is why, 246 insurance companies were also taken over in 1956, with the formation of the LIC.

And to organise fiscal controls more tightly as per the goals set by the Tata-Birla Bombay Plan, nationalisation of the 14 major banks became a necessity. Anyhow, if not nationalised, many of the private banks would have collapsed. The 14 major banks nationalised out of the existing 86 banks, controlled 85% of banking in India. In 1980 another 6 banks were nationalised to save them from collapse.

Bank nationalisation was not only necessary to bail out the collapsing private banks, it was a key necessity to give the necessary fiscal push to an economy that had reached the end of its teather.

First, big business required massive investments in infrastructure if it was to grow. Lack of infrastructure and capital was leading to stagnation and decline. Nationalisation and the expansion of banking, was a necessary factor, to systematically tap the people’s savings in order to generate the necessary capital.

Second, the rural sector faced an agrarian crisis. The widespread famine in 1967, and the Naxalbari uprising in the same year found the rulers panic-stricken with the spectre of communism haunting them. The PL-480 grain doles, had, by now got thoroughly discredited as a source for funding CIA operations within the country. An alternative had to be found.

The ‘Green Revolution’ was their answer to stem off a potential ‘Red Revolution’. Besides, imperialist agri-business sought to switch their strategy from sale of grains (PL-480 style) to the promotion of seeds, fertilisers, pesticides, tractors etc. The initiation of the Green Revolution required certain amounts of seed capital, given on a concessional (even free) basis to farmers, to encourage them to turn to the HYV varieties. Such capital and widespread disbursement could best be achieved through nationalised banking. So publicly raised funds were used to initiate the imperialist sponsored green revolution. A vast network of rural banking was set up, first to promote the green revolution; second to tap the surplus created to channel it into savings for use by government/big business for infrastructural development. By the mid-1970s, there were 196 RRBs, 24,000 cooperative banks, 92,000 Primary Agricultural Credit Societies, 2966 lending units for long-term credit and a host of other financial institutions for rural banking like NABARD, etc.

Besides, linked to this, the focus for rural development changed.... from asset generation to poverty alleviation. This coincided with Indira Gandhi’s slogan of ‘Garibi Hatao’. While in the first two decades focus was on irrigation, land development etc; now the focus changed to poverty alleviation schemes like IRDP, Jawahar Rojgar Yojna, Indira Vikas Yojna etc, etc. All these schemes were intricately linked with bank lending and finance, necessitating a wide network of branches. Both the Green revolution and so-called poverty alleviation schemes (employment generation) were geared to extending the market for commodities while keeping as much of the old semi-feudal relations in tact, as was possible. It was also an instant solution to the Naxalite threat, by immediate infusion of funds into the rural populace to prevent revolt.

That is why after nationalisation we see a vast growth of banking within the country. The chart on the next page gives a picture of that growth.

Here we see the vast amounts garnered by the nationalised banks in the form of deposits, reaching over Rs. 7 lakh crores in 1999. The bulk of these funds continued to be cornered by the government and big business. Credit to the priority sector, though increasing in absolute terms, actually resulted in only a nominal increase of the total credit, in the three decades of nationalisation — from 12.2% of the total in 1969 to just 14.4% of the total in 1999.

In 1981 Indira Gandhi took the first IMF loan. One of the first conditionalities implemented by the government was in the sphere of banking. Immediately the government declared that nationalisation acts as a disincentive to the growth of private banking; and that henceforth there will be no further nationalisation of banks.

By 1984 new recruitment in the PSBs was stopped, and restrictions were imposed of issuance of licences augmenting branch expansion.

In June 1990, on the eve of the second IMF loan, the IMF issued its blue print for the process of bank privatisation (see box) which, till today, each successive government has been following to the letter. In 1991 the Narsimham Committee was appointed to chalk out the details towards privatisation as per the IMF recommendations. In the same year licences for private banking was issued resulting in the opening of 10 private banks by 1993. Also, foreign banks were allowed to extend their branches all over the country. To speed up the reforms the Narsimham Committee II was appointed by the United Front government (notwithstanding the CPI/CPM anti-TNC rhetoric), which the BJP government is implementing with a speed that makes the TNCs euphoric. Till now, nearly 90% of the IMF ‘recommendations’ have been implemented. The dilution of government equity to 33%; the entry of big business groups and write-off of the huge NPAs (bad debts); a further reduction of staff; and then the final ‘strategic alliance’ with TNCs is what remains.

This privatisation continues apace even though the reforms period has been accompanied by massive banking scams — like the Harshad Mehta scam, the Indian Bank scam, BCCI scam, Bhansali scandal etc — and the collapse of 17 private banks. Indiscriminate licences have been issued even to local areas, involving a capital of just Rs. 5 crores. In fact, in these 14 years of reforms, frauds, scams and outright loot has resulted in 17 private banks being bailed out by the nationalised banks. These have been merged with the PSBs, which have taken over their bad debts as well.

Besides, of the 10 new banks started in the 1990s, seven are in a critical condition, and one — the Times Bank — has collapsed and been taken over by the HDFC. Relative to their brief existence, most have acquired disproportionately large NPAs (bad debts) through fraud and mismanagement. The only two successful ones — HDFC and ICICI — have virtually been taken over by foreign capital. The foreign stake in HDFC is 63% and is increasing at a rapid pace, while that of ICICI has reached the ceiling of 49%. What privatisation of PSBs will entail is clear from this picture of private banking in the 1990s.

The steps outlined by the IMF (see box on the next page) are being systematically implemented:

The so-called non-viable branches in the rural areas are to be closed down. The Narasimham Committee II has suggested : to bring down priority sector advance from the mandatory 40% to 10%; the stoppage of all subsidised loans to the economically backward sections and the dilution of government equity in PSBs to 34%. Earlier banks had to lend at the rate of 6% to the agricultural and other priority sectors — now, they are not allowed to lend below the ‘prime lending rate’, which is a minimum of 11%.

So we find that in the course of the 1990s the Congress(I), UF, and BJP governments have systematically been implementing the 1990 ‘recommendations’ (rather instructions) of the IMF. If we look the two Narsimham Committee reports, which have been the basis for government policy, they are nothing but carbon copies of the 1990 IMF ‘recommendations’ !!

In the period of globalisation and increasing domination of international finance capital, the model of development and the focus for market expansion is the top 10% of the population. So all economic policy is aimed at hitting hard the bottom 80 to 90%, in order to fatten the top 10%. So subsidy cuts, disbandment of PDS, drastic reduction in welfare measures, etc., are geared to push the mass into even further destitution, and utilise those funds to subsidise/promote big business, TNC interests, infrastructural development etc, etc.

In addition, the green revolution is in crisis and the banking structures that accompanied them are no longer required. Besides, foreign agri-business plans to enter straight into the agricultural sector. Finally, the bulk of the poverty alleviation schemes are being wound up or reduced to nominal levels (or focussed in regions where people’s revolts exist), so the banking structures that accompanied it are no longer required. Finally, the tapping of people’s savings will be restricted, due to mass impoverisation; and the 10% that will be able to invest their savings will be serviced by private and foreign banks, with higher service charges.

Not only will such a step further infringe on the sovereignty of the country, but will have a disastrous impact on the lives of the people. But the rulers of our country, acting as the most vile agents of the foreign powers, are pushing through this ‘reform’ at break-neck speed. They will get bouquets from the likes of Clinton and Bush, but brickbats from the masses of India.

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