Reversing Bank Nationalisation
The passage of the Banking Laws (Amendment) Bill in the winter session of parliament marks a turning point. The Manmohan Singh government has undone what the Indira Gandhi government did. The Bank Nationalisation Act nationalised all the major private banks in 1969. Many of these banks were linked to industrial houses. The 2012 amendment to the banking laws paves the way for the entry of corporate houses into banking. Thus, the wheel has turned full circle.
The Manmohan Singh government has effected this retrograde step after repeated efforts since 2005. During the first term of the UPA government, this move could not succeed because of the firm ...view middle of the document...
The Standing Committee on Finance chaired by the BJP MP Yashwant Sinha recommended that the voting cap can be raised from 10 per cent to 26 per cent instead of just removing the cap altogether. The government accepted this recommendation. With the passage of the Bill, foreign banks and foreign financial institutions can acquire control with 26 per cent voting right and by adopting various devises.
The other aspect of the Bill adopted is that it enables new banks to be set-up in the private sector. The Reserve Bank of India has been empowered to license and regulate such banks. There will be no bar on corporate houses opening banks.
Prior to nationalisation in 1969, most of the private banks were linked to industrial houses – United Commercial Bank to Birla firms, the Oriental Bank of Commerce to Thapar companies, the Central Bank of India to the Tatas. Banks controlled by industrial houses used the public deposits for their own purposes and excluded the farmers and small enterprises from access to finance.
One of the main objectives of bank nationalisation was to break the unholy nexus between big business houses and banks since it seriously distorted the allocation of credit and excluded major sectors such as agriculture and small and medium industries. It is after nationalisation that the public sector banks developed the banking network and provided agricultural credit and evolved priority sector lending. There are over 65,000 branches of public sector banks. The branches in rural areas which were 58 per cent of the total in 1991 declined steadily after liberalisation and was 40.8 per cent in March 2011.
The Reserve Bank of India had resisted the neo-liberal arguments of the Manmohan Singh government and was visibly reluctant to endorse the entry of new private sector banks including those sponsored by corporates. Even after the NDA government’s announcement to allow FDI in banking up to 74 per cent, the Reserve Bank of India was of the view that, “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses….Diversified ownership becomes a necessary postulate so as to provide balancing stakes.” (Chapter VIII of RBI’s Report on Trend and Progress in Banking in India, 2003-04).
P Chidambaram, as the finance minister in the first tenure of UPA government and subsequently in the second tenure, has done everything to push for the neo-liberal reforms in banking. Faced with the reluctance of the RBI, the finance minister declared that the RBI would oversee and have a final say on the opening of new private sector banks. He sought to neutralise the RBI reservation by decreeing that the Bank would be the sole arbiter and regulator of the banks. The RBI subsequently brought out draft guidelines for the opening of new banks.
A number of corporate houses like Reliance Industries, Aditya Birla...