Creating oligopolies? The pitfalls of neoliberal banking and agri-credit policy

Two successive NDA governments have taken forward the neoliberal agenda set in motion in 1991, with disastrous consequences for banking and agricultural credit that have resulted in greater income inequality and corporate plunder.

At a two-day nationwide strike against the Union government’s proposed privatisation of banks, in Hubballi, Karnataka, on March 16.

In 1992, Finance Minister Dr Manmohan Singh presented the Budget, which said that much was wrong with the economy and it was time for change. In the Congress’ Parliamentary Board Meeting, members of Parliament asked him: “Are you not criticising what Nehru did, what Indira Gandhi did? Why are you doing it? What is the meaning of these policies? Is it going to lead us to higher growth?” His answer was: “Give me three years, I will solve all the problems.” It has been 30 years now and far from solving all the problems, the country finds itself in a precarious situation.

Speaking at a programme titled “Contemporary issues and challenges in the banking and public sector at the current juncture”, at an “Alternate Gyan Sangam” retreat organised by the All India State Bank Officers’ Federation (AISBOF) in 2016, Prof. Victor Louis Anthuvan, an expert in globalisation and global finance, said: “Reforms were needed. In what? In abolishing corruption in the country; for introducing efficiency into administration; in people-government relationship; in redefining growth. But unfortunately in this country, reforms were given a wrong meaning; they said reforms means privatisation of the public sector, it only means liberalising all the controls. That’s not reforms. Reforms should have abolished corruption, wiped out poverty, destroyed the caste system, and lifted people out of poverty. That is where China scored over us.”

When we analyse 30 years of reforms, we must look at history to know why nationalisation of banks and related policies were needed, how they changed the economy and how the reversal has been affecting the masses.

Need for bank nationalisation

The objectives of bank nationalisation were:

i. Wider territorial and regional spread of the branch network.

ii. Better mobilisation of financial savings through bank deposits.

iii. Reorientation of credit deployment in favour of small and disadvantaged classes all along the production spectrum.

iv. Removal of control by a few business houses.

v. Professionalising bank managements.

vi. Providing adequate training and reasonable terms of service to bank staff.

By 1990, rural credit, especially small credit, had increased, and the number of branches had also increased, especially in rural and semi-urban areas. The credit-deposit ratio had improved and the government had given a fillip to priority sector lending. The lead bank scheme helped in planned credit disbursal in every district and the government boosted employment in the banking industry, providing opportunities to thousands of youths through implementation of the reservation policy.

Income inequality

There was also a reduction in income inequality. In 1990, the share of earnings of the top 1 per cent of income groups came down from 21 per cent in 1940 to 6 per cent. The share of the bottom 51 per cent grew faster, according to a report in Finance Matters (June 2020) from the Centre for Financial Accountability.

However, the India Social Development Report 2018 from the Council for Social Development showed that the share of the top 10 per cent of earners had skyrocketed by 2017 to 80.7 per cent, while the share of the bottom 50 per cent plummeted to 2.8 per cent. This is clear proof that the rich are getting richer and the poor are getting poorer. This phenomenon has a direct relation to bank lending.

The process of reversal of nationalisation commenced through recommendations of several committees that were in line with the directions and policies of the World Bank and the International Monetary Fund (IMF). In summary, they recommended a reduction in the government’s stake in public sector banks to 33 per cent or lower; the merger and consolidation of banks; liberal entry norms for foreign banks and increasing foreign direct investment in private banks; proportionate voting rights for shareholders; new licences to industrial houses; phasing out priority sector lending; outsourcing of bank jobs and promoting asset reconstruction companies; and a sharp reduction in bank staff.

Except the first, all the other recommendations have already been executed.

Change in loan composition

India’s external loan outstanding as on March 2021 was $570 billion, according to a Reserve Bank of India (RBI) report. The lenders are dictating terms on what should be done in the country since we have fallen into their debt trap.

A RBI Report (BSR1) said that within the coutry, as of March 1991, 94.9 per cent of the accounts and 22 per cent of the loan outstanding were less than Rs.25,000. Some 98.3 per cent of the accounts and 30.2 per cent of the loan outstanding were less than Rs.1 lakh. Only 577 loans (amounting to 10.8 per cent of outstanding) were above Rs.10 crore. However, as of March 2021, only 19.4 per cent of the accounts with 0.38 per cent of loan outstanding were less than Rs.25,000 and 75.5 per cent of the accounts (7.93 per cent of outstanding) were less than Rs.2 lakh, whereas just 13,109 accounts accounted for an outstanding of Rs.32,27,100 crore, amounting to 30.05 per cent of the total loan outstanding.

This is how banking has changed in 30 years.

The above-18 population numbers 104.25 crore, but there are only 27.1 crore loan accounts. This means that almost 75 per cent of adults do not have access to bank loans and they depend on moneylenders, non-banking finance companies (NBFCs), fintech companies and microfinance institutions, often paying 24 per cent interest.

A closer analysis of RBI data shows that as of March 2014, 82 per cent of the bank branches, 65 per cent of the loan accounts and 75 per cent of the loan outstanding were with public sector banks. However, as of March 2021, this had reduced to 68 per cent of all branches, 37.5 per cent of accounts and 58 per cent of the loan outstanding.

By providing government business to private banks, merging public sector banks and placing them under “Prompt Corrective Action”, restricting their lending, and reducing the staff strength in them, the government has encouraged corporate players at the expense of public sector banks. While public sector banks were busy opening Jan Dhan accounts, private banks were taking over loan accounts.

Branch distribution

According to RBI data from 2021, the number of rural branches has come down from 58 per cent to 29 per cent and once again the urban and metro regions have cornered the maximum amount of loans.

Take a look at agriculture credit. In the priority sector, 18 per cent should go to agriculture. Within this 18 per cent, there was a stipulation by the RBI that only 4.5 per cent can be indirect finance and the rest 13.5 per cent has to be direct finance. Now, the distinction between direct and indirect credit stands abolished. Thus, a lot of credit is going as indirect finance.

It turns out that only 44 per cent of the total agricultural credit given in 2013 and 2014 were of size less than Rs.2 lakh. The rest 56 per cent of the direct agricultural finance was of a greater size. Who are these farmers? It is surprising that loans have also increased by more than Rs.1 crore size. One crore, 10 crore, 25 crore, that is how the segment of direct agricultural finance has grown over the years. Also, it has been found that 28 per cent of the total agricultural credit given by commercial banks in India is through urban and metropolitan branches and not by rural or semi-urban branches. Who are the beneficiaries?

In a study titled “Bank Credit to Agriculture in India in the 2000s: Dissecting the Revival”, Prof. R. Ramakumar revealed that corporates were the major beneficiaries of the surge in farm credit. He also said that that 37 per cent of the total agricultural credit is given in February and March. So, actual farmers are not getting credit. Whatever they get in the name of Kisan Credit Card, whose number increases by 10 per cent in the Union Budget every year, is only renewal of the card with 10 per cent interest accrued. The farmer does not get any cash. The new farm laws are also aimed at furthering the cause of corporates and not farmers.

Workload in banking industry

While State Bank of India (SBI) has 1,680 customers per employee, HDFC Bank, the leader among private sector banks, has 467, while ICICI Bank has just 353. The lowest number of customers per employee in public sector banks is 1,348 in Canara Bank and the highest is 2,500 in Bank of Maharashtra. The lowest number of customers per employee among private banks is 325 in Axis Bank and the highest is 923 in Federal Bank. If public sector banks have to serve the public, there is need to increase the number of branches, especially in rural and semi-urban areas, and the staff strength.

Another fallout of the changes in banking policy has been the disappearance of development banks. Industrial Development Bank of India, Industrial Credit and Investment Corporation, Unit Trust of India, and Housing Development Finance Corporation of India were all converted into private commercial banks, which affected long-term finance. Small Industries Development Bank of India (SIDBI) and NABARD (National Bank for Agriculture and Rural Development) are the only two development banks left. The government has announced plans to set up a new development bank, but it is not known when it will be functional.

Ceiling on corporate credit

As of March 2015, outstanding loans of top 10 corporates amounted to Rs.7,31,000 crore, and the outstanding of 12 companies that became non-performing assets (NPAs) stood at Rs.3,45,000 crore. Looking at this, the RBI announced in 2016 that there would be a ceiling on corporate loans and that by 2019 no corporate house would be able to have more than Rs.10,000 crore in loans. It further said that they should mobilise funds from the bond market. But this apparently does not seem to apply to corporate houses that are in the good books of the government.

Destruction from 2014

Before 2014, the Central government occasionally interfered with the functioning of public sector banks, but once Arun Jaitley became Finance Minister, he started reviewing them every quarter and sometimes even every month. This practice continues now. The Gyan Sangam 1 conclave held at Pune in 2015 laid the road map for the future, which involved step-by-step privatisation. This was followed by Gyan Sangam 2, Vichar Manthan and Enhanced Access and Service Excellence (EASE). These were annual conclaves to tell bank chiefs what they should do. While the Gyan Sangams were authored by Mckinsey, EASE was the brainchild of the Boston Consultancy Group.

NPA crisis and legalised plunder

NPAs have existed from the day the concept of banking evolved. But the Modi government sounded an alarm and modified the asset classification norms. Suddenly, any loan not serviced in 90 days was classified as non-performing. The government implemented the Insolvency and Bankruptcy Code (IBC) and set up the National Company Law Tribunal (NCLT). Harsh Goenka, chairman of the RPG group of companies, said in a tweet: “Promoters slash away on the side, take the company to cleaners, get an 80-90 per cent haircut from bankers or the NCLT. That’s the new game in town.” It is now becoming clear that the IBC was brought to help a few corporates to loot banks through the Resolution Plan (RP) and to help other corporates buy industries worth thousands of crores of rupees at throwaway prices. The banks alone face the brunt, and the top executives get away. Some even join the Board of Directors of some of these corporates after retirement.

Insolvency and Bankruptcy Board of India (IBBI) reports showed that 80 per cent of the cases brought to the NCLT involve loans above Rs.10 crore. Against the legal norms, which stipulate that cases must be closed within 180 days, the average time taken is 406 days. In 360 major cases that were settled, the average haircut (write-off) was 80 per cent. Initially, the code stipulated that creditors had to vote with 75 per cent majority to agree for the settlement. This rule was amended to suit Mukesh Ambani to buy Alok Industries worth Rs.29,253 crores with a 83 per cent haircut.

Meanwhile, Anil Ambani got away with a Reliance Home Finance loan of Rs.11,200 crore with 60 per cent haircut and Reliance Infratel loan of Rs.41,055 crores with 89 per cent haircut. Mukesh Ambani has offered just Rs.4,235 crore to banks against the Reliance Infratel loan of Rs.41,055 crore plus accrued interest owed to banks. Reliance Infratel has 43,000 towers and a 1.72 lakh-kilometre optical fibre network which will be taken over by Reliance Jio for a pittance. The loser is not Anil Ambani but the banks. In the last eight years alone, the government has written of Rs.10.8 lakh crore in debt but it is not willing to share the names of the defaulters.

Jan Dhan Yojana

There have been many attempts from 1969 towards financial inclusion, but the current government’s Jan Dhan scheme of opening accounts for everyone and creating a world record in the process was nothing but empty drama. When the number reached 26 crore on January 1, 2017, the government claimed that 99.9 per cent of all Indians had bank accounts. Now it claims that as on July 28, 2021, there were 42.83 crore Jan Dhan accounts with a total balance of Rs.1,42,948 crore. Are these the accounts of poor people? In 2018, the government stated that 20 per cent of these accounts were dormant. Many customers have closed their account owing to bank charges. The government must realise that financial inclusion is not just about opening accounts.

Regarding women and banking, the previous United Progressive Alliance (UPA) government made an effort in that direction by setting up a Women’s Bank of India to encourage women’s participation in banking and give them access to credit. However, the current government merged it with SBI and a novel idea was killed.

As per the Bank Nationalisation Act, all public sector banks, including SBI, had an Officer Director and Employee Director representing associations and unions. After 2014, these posts have not been filled in spite of a Supreme Court direction and recommendations from the respective boards of banks. This has made the boards opaque and credit decisions as well as write-offs are taking place to please the masters.

Apart from dilution of agriculture credit, the government has changed many norms to enable the rich get the benefits. Loans of Rs.250 crore in the micro, small and medium enterprises (MSME) segment is priority sector. Similarly, Rs.25 lakh in housing in rural areas is priority sector. If the banks do not want to lend under priority sector, they can invest in the Rural Infrastructure Fund of NABARD or in Priority Sector Lending Certificates.

After mergers of several public sector banks with effect from April 2020, the number of public sector banks has come down from 28 to 12, which has reduced the number of branches, staff and credit and affected customer service.

Cooperatives under attack

An advertisement in The Hindu by The Gujarat State Co-op Bank Ltd on the setting up of a Ministry for Cooperatives was telling. It said: “This Ministry will bring millions of people serving in the sectors including banking, farming, fisheries, animal husbandry, sugar manufacturing and milk processing units under a single platform for mainstreaming development and improve their quality of life.”

It also said that under India’s new-found blueprint of collective growth with inclusive approach, the Cooperative Ministry would encourage sectors across manufacturing, service, housing, labour and banking, to name a few.

The National Co-operative Union of India’s Statistical Profile 2018 said that there were 8,01,915 functioning cooperatives in India. There were also 1,77,605 credit co operatives. The credit cooperatives had a total of 206.16 million members, while non-credit cooperatives had 83.92 million members. It added that there were 17 National Federations, 390 State Federations, 2,705 District Federations, 1,435 Multi State Co-operatives and 97,961 Primary Agriculture Credit Societies (PACS). The PACSs have a presence in 6,44,458 villages in the country. Their combined share capital was Rs.84,616.30 crore. The government has decided to bring urban cooperative banks under the control of the RBI, which does nothing except imposing fines or announcing moratoriums.

Digital divide

India has a very weak digital security and fraud detection system. The United Payments Interface (UPI) platform is very insecure and according to RBI the number of digital frauds is increasing at an alarming pace. But no efforts have been made to fix the security issues. Instead, new private digital platforms are being formed. People were forced to go digital through demonetisation, which was a monumental failure, and forcing Aadhaar-bank linkage has made it easy for fraudsters to dupe innocent customers. The Banking Laws (Amendment) Act, 2012, paved the way for the implementation of privatisation via i) merger of banks, ii) takeover of Indian banks by foreign entities, iii) dilution of government shareholding, iv) provision for the private sector to tighten its grip in public sector banks, and v) entry of new private banks. Now the government plans to allow corporates into banking including by dilution of shareholding. Parliament approval is needed only for reducing the government’s share below 50 per cent. The government could do it easily in the case of Life Insurance Corporation of India (LIC) through a Budget announcement and General Insurance Corporation (GIC) through an amendment.

The government was forced to withdraw the financial resolution and deposit insurance Bills from Parliament after a mass campaign. But the government is keen on bringing them back. A Bill moved in Parliament during the first National Democratic Alliance government to reduce government shareholding in banks to 33 per cent did not see the light of the day. But today, the government does not seem to be bothered about standing Committees of Parliament or even Parliament itself.

NITI Aayog has recommended the sale of two banks. If privatisation succeeds with one bank, the largest bank in the country, SBI, may also be taken over by a corporate. Lakshmi Vilas Bank became a foreign bank with no compensation for its shareholders. The same will happen with big banks too. That is what the World Bank and the IMF, and the Bharatiya Janata Party (BJP), want.

Privatising insurance

In the year 1956, 245 private companies were merged and nationalised to bring Life Insurance Corporation of India into existence. The Government of India gave an initial capital of only Rs.5 crore, but today, LIC is sitting on a massive asset base of Rs.38 lakh crore. This is the entity that the government wants to hand over to the private sector, starting with listing LIC and divesting the government’s shares. LIC is the only company which pays 95 per cent of its profit to policy holders as bonus.

The test for an insurance company lies in its claim settlement. The Insurance Regulatory and Development Authority (IRDA) itself has said that on average, LIC settles 99.6 per cent of all claims. LIC’s policy lapses are a mere 5 per cent. In the private insurance industry, lapses are around 30 per cent. In the area of life insurance penetration, LIC is the top institution in the world. As far as general insurance penetration is concerned, GIC is the global number one. Soon after coming to power, the first Narendra Modi government passed the Insurance Amendment Bill in March 2015, subsequent to which the FDI limit in insurance was raised from 26 per cent to 49 per cent. Now the government has appointed consultants for disinvestment of LIC, and GIC privatisation is also on the anvil.

What needs to be done?

An RBI report said that as on July 20, 2021, aggregate deposits in banks stood at Rs.155,49,047 crore and bank credit was Rs.108,32,938 crore. To strengthen the banking sector, the government should direct banks to lend to agriculture, micro and small enterprises, women’s self-help groups directly and not through MFIs, and to youths for educational purposes as well as to start enterprises and also provide hand-holding support. They should also provide housing loans less than Rs.30 lakh to low-income groups and cover the entire loans under these under the Credit Guarantee Scheme with 100 per cent guarantee.

The government must double the employee strength in public sector banks and give them the assurance that they will not be privatised and the banks on their part must concentrate on development of rural and backward areas. The regime should optimise priority sector lending, which should be increased to 50 per cent of the total loans with a sub-target for loans below Rs.2 lakh. The RBI must become independent and the government must fill it with actual experts and not its cronies. Former RBI Governor Y.V. Reddy once said: “Central banks have to ensure that bank managements and the financial sector in general serve the masses, and not merely the elite or the financially active.”

The government must also appoint Employee Directors in public sector banks as they play the crucial role of watchdogs. It is also time to bring back development banks. Global experiences show that development banks have made a lot of difference. With a good credit guarantee scheme backed by the government, they can take risks. The government must also strengthen NABARD and SIDBI.

The NCLT needs to be shut down and the government must implement stringent laws for debt recovery. Today, corporate loans become NPAs but the promoters live in style or escape from the country. The Parliamentary Standing Committee on Finance, in its report released in February 2016, did a good analysis on this issue and suggested effective measures, including publication of names of large defaulters and fixing accountability on board directors for large loans, including Ministry and RBI representatives. The government should strengthen cooperatives and farmer producer organisations by protecting their autonomy and by supporting State governments in mentoring them. It also needs to strengthen women’s SHGs and set up a women’s bank. The SEWA bank is already present as a model. Similar banks can be started in States by supporting SHG federations. The country needs specialists for agriculture, allied activities, MSMEs, women’s entrepreneurship, and so on. The authorities must look to recruit such specialists and provide employment to them in banks, with suitable salaries and work-weeks. The government must drop the plan to privatise LIC and GIC. They serve the masses and provide huge support to the government. Their real value cannot be assessed by the stock market. Also, public sector banks, LIC and GIC have enormous data pertaining to users. With privatisation, this data can be misused if they land in the hands of the private sector and may even pose a threat to national security.

There are alternatives; the need of the hour is political will, to stand with the majority of the people and not create oligopolies that will only benefit a minuscule minority.

D. Thomas Franco is a former general secretary of the All India Bank Officers’ Confederation (AIBOC).