Banking Reforms: Alarm Bell of Denationalisation and Foreign Takeover

RBI Govenor Raghuram Rajan’s recent proposals made before the American financial establishment and press in Washington portend an ominous future for the Indian banking sector. Together with the Banking Laws (Amendment) Bill 2011 passed by Parliament during the 2012 Winter Session, his open invitation to foreign banks to take over Indian banks and the assurance to mete out near-national treatment to such foreign banks clear the decks for a veritable denationalization of the Indian banking Industry, where the scene is still dominated by public sector Indian banks with an industry share of 80% with private Indian and foreign banks accounting for the rest, 15 percent and 5 percent respectively.

Announcing that the policy for entry of foreign banks is in the making and will be unveiled soon, the former IMF chief economist and current head of India’s apex bank, Rajan assured his audience of the Indian financial establishment’s readiness to provide a big opening for foreign banks in India. “That is going to be a big big opening because one could even contemplate taking over Indian banks, small Indian banks and so on”, declared Rajan, adding “if you adopt a wholly owned subsidiaries structure and we are coming up with details on that in next couple of weeks, we will allow you near national treatment.”

Undoubtedly, Mr. Rajan’s words must have been music to the ears of the sinking banking giants of America who can now think of laying their hands on more than Rs. 70 lakh crore of public money held by the Indian banks. What a grand bailout package from Raghuram Rajan for his crisis-ridden bosses!

In spite of the devastating international experiences of 2008-10 global financial crisis, especially the spectacular collapse of American banks and financial institutions, the UPA-2 government is bent upon exposing the banking and insurance sectors in India to heightened risk through increased global integration and private penetration. It is being argued by the advocates of reforms that “foreign banks incorporated as local subsidiaries and, thus, following Indian laws will be more effective for risk control.” But recent experience shows that many foreign banks, irrespective of their entry through subsidiary or branch route, withdrew from the credit market in many counties including in India during the global financial crisis of 2008-10 plunging them into deeper crisis.

This highlights the true character of footloose finance capital – making hay while the sun shines and fleeing at the first sign of crisis to greener pastures. Not only this, some of the foreign banks operating in the country have also been found to be involved in various scams in the past but went scot free without their licences being cancelled. It is very clear that foreign banks have never contributed to the country’s economic growth and development as they are interested only in profits and have no role in social banking.

Apart from facilitating greater forays by foreign banks in the Indian banking industry, the banking reforms also mean go-ahead signal for in-house banking by corporate groups. With big corporate groups like the Ambanis, Tatas, Birlas all eagerly waiting to launch their own banks, the country is being pushed back to the pre-nationalisation pattern wherein all big corporate houses had their own banks and all big banks were owned by corporate houses, and these banks without any social control used to amass and loot public money in their own private interests.

Already, government policies have bled public sector banks white, forcing them to loan out huge sums to corporate houses and accumulating NPAs in tens of billions of rupees thanks to the virtual immunity granted to corporate defaulters. The Banking Bill also seeks to remove restrictions on voting rights of foreign shareholders and increase voting rights of private investors in the PSBs (increase in the voting rights of shareholders in the private sector banks from 10% to 26% and from 1% to 10% in public sector banks). This will also pave the way for private corporate banks to form cartels to take over nationalised banks. This apart, 74 per cent FDI is allowed in private sector banks.

Clearly, if these banking reforms are allowed to be implemented, the Indian banking industry will be left effectively denationalized with increasing domination of corporate and foreign banks. This will deal a severe blow to the social role of the banking industry. The already crisis-ridden agricultural sector and various other priority sector lending commitments will face severe credit crunch. This will also reduce the election year flagship scheme of food security to a big farce, because it can only be sustained with sufficient flow of cheap institutional credit to peasant agriculture.

Besides, these reforms would encourage the ongoing closure and merger of existing banks leading to further downsizing and outsourcing of so-called ‘non-core services’ to outside agencies, even as vacancies pile up in the banking industry. In the meantime, this will create two separate compartments in banking industry with corporate and foreign banks, infamous for money laundering and hawala business, attracting the creamy layer as their clients and taking the cream of banking profits, while the PSBs remain burdened with routine official responsibilities like carrying out cash transfers and opening of zero balance accounts etc. for the beneficiaries of various government schemes.

The movement of bank employees has successfully resisted the drive to privatize and open up this key sector of the Indian economy for the best part of the last two decades of neoliberal reforms. Now, the current threat of denationalization and foreign take-over must be resisted by even more determined working class action in close alliance with various ongoing people’s movements against corporate and MNC takeover of all our key resources and assets.

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