Whose Cause RBI Top Executives are Serving?

C P Krishnan

THE public statements of governor and deputy governor of RBI advocating privatisation of public sector banks are highly deplorable. Naturally a suspicion arises in the minds of the common public as to whose cause they are serving, public cause or that of corporates?

While delivering the Kotak Family Distinguished Lecture at Columbia University at New York, Dr Urjit Patel, governor of RBI (as reported in The Hindu dated  April 25, 2017) has spelt out the following:

·         Merger and consolidation of PSBs (public sector banks)

·         Voluntary retirement service to reduce work force

·         Weaker PSBs losing market share is good

·         Private banks gaining market share is a good thing

·         PSBs are to go for disinvestment

·         Some PSBs can be privatised in order to reduce the capital from the government on account of huge NPAs (Rs 6.15 lakh crores as of December 2016)

Dr Patel’s deputy, Viral Acharya, deputy governor of RBI (according to Live Mint dated April 28, 2017) has echoed the voice of Dr Patel in a meeting of FICCI delivered in Mumbai and suggested the following:

·         Throwing more good money (capital from the government) for the bad (huge NPAs) has to be stopped

·         Healthier PSBs have to go for disinvestment (partial privatisation through selling their shares in the market)

·         Merger and consolidation of PSBs

·         Gradual killing of weak PSBs by restricting them from accepting further deposits and preventing them from further lending

·         Encouraging private banks by transferring business from weak PSBs

·         Some of the nationalised banks need to be re-privatised

Thus both the executives are brazenly supporting privatisation of PSBs. As a precursor to that, they want PSBs to be weakened and private banks to be strengthened.

As already apprehended, the government of India and RBI are coming down heavily on the PSBs. 

RBI governor and deputy governor are appointed by government of India for regulating the banks.  But strangely they take the side of the corporates. If they don’t have any commitment for the PSBs, how can they govern the PSBs in an impartial way?

The attention of these top executives of RBI is drawn to the RBI reports released earlier.

The discussion paper of RBI released on August 11, 2010 clearly explains the role of the private sector banks prior to nationalisation in 1969 and the objective of nationalisation of the banks 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 RBI discussion paper dated August 27, 2013 explains the role of the PSBs clearly 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, retail 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...”

DANGER OF BUSINESS HOUSES OWNING BANKS

The RBI report of 2010 further shares the experience of new generation private banks since 1993:

“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”

Further the same RBI report of 2010 eloquently explains the danger of business houses owning banks:

“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.”

“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 Hong Kong 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.”

Thus the same RBI report of 2010 observes: “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.”

MERGER AND CONSOLIDATION BAD

The RBI report dated August 27, 2013 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”

Thus the RBI reports of 2010 and 2013 amply explain the gains of the PSBs and imminent dangers of private banks and merger and consolidation of PSBs. It is strange and inexplicable that still the top executives of RBI advocate consolidation of PSBs and privatisation of PSBs.

As a regulator what RBI has done to prevent PSBs from becoming weak, if at all they consider some of the PSBs are weak?

HUGE AMOUNTS OF CORPORATE NPAS

The minister of state for finance Santosh Kumar Gangwar said in a written reply to the Rajya Sabha that there were 661 NPA accounts above Rs 100 crore amounting to Rs 3.78 lakh crore from public sector banks as on March 31, 2016. What action has the government and the RBI taken for recovery of these huge NPAs?  Why are they soft towards them?  Why are stringent laws not enacted? Why are they not revealing the names of the willful defaulters despite Supreme Court directive and recommendation of standing committee on finance? By sleeping over huge NPAs due from the corporates, are they not facilitating loot and plunder of public money? By citing the huge NPAs as weakness of PSBs and trying to hand them over to the same private hands, are they (government and the RBI) not encouraging willful defaulters?

What is the role of RBI in implementing its own mandatory guidelines by private sector banks with regard to priority sector lending or opening of rural branches? Why so many private banks numbering 559 collapsed between 1947 and 1969? Why more than 25 banks collapsed post nationalisation of banks in 1969?  What is the role of RBI as a regulator? Why the new generation private banks – Global Trust Bank failed with huge net loss of Rs 1100 crores? Why these failures could not be prevented? Why has RBI failed to intervene in time? What is the accountability of the regulator and the promoter for failure of these banks?

Do they (RBI governor and deputy governor) want that the corporate willful defaulters, who were being allowed to plunder people’s savings kept in PSB, to be the owners of the banks again?  They have to answer the nation. The bank employees of the country are in the midst of united struggle for last more than two and half decades against the policy of privatisation of public sector banks and our fight will continue with renewed vigour and strength garnering wider public support against the machination of the central government to dismantle the PSBs.  The utterances of governor and deputy governor of RBI are the manifestation of the policy of the central government and this cannot be allowed to pass unopposed.

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