More on bank privatisation

Banks are in news these days for one reason or the other. One common refrain in such ‘news stories’ being that banks are sick, not viable and they need reforms. Meanwhile, the government has announced its decision to reduce its stakes in public sector banks to 33%. Are the banks really sick? The answer is No. Public sector banks are making profits. Even the loss-making banks like UCO bank have turned the corner this year. Then why this outcry?

It is not the ordinary citizen of India who is crying himself/herself hoarse about public sector banking. Ordinary men and women are happy with the banks, farmers are happy with the banks, and small industrialists do want the banks to reach out to them more and more. In all these sectors the recovery percentage is very high. (As per a RBI report in 1999, the recovery of small and medium loans is as high as 67%.) Compared to 1950s and 1960s the farmers are getting more credit. At least 20% of Indian farmers have been released from usury and the clutches of jotedars and moneylenders. It is these people who constitute crores and crores of Indian people and they do not complain about the banks. True, banks have their share of problems and people do have some criticism about the customer service but they definitely do not want to see the public sector banks wound up.

It is the industrialists represented in CII, FICCI and other chambers who complain about public sector banks. It is they who say that Indian pubic sector banks are not up to the mark in customer service, they are not giving adequate credit, and that they have more procedures and systems than required. These people also want their money transferred in seconds from stock exchange to stock exchange. Strangely enough, these are the very same people who do not want to pay back the bank loans. They search every nook and corner of law books and statutes to search for the remotest possible way to dodge repayment of loans. They have succeeded in finding such loopholes in the Banking Companies Act.

The secrecy clause

There is a secrecy clause in the Act which empowers a banking company to conceal the amounts set aside by it as bad loans. The bad loans are those which could not be repaid due to the vagaries of business cycle or due to natural calamities etc. There is no point in pursuing the recovery of such loans, as such borrowers do not have any means to repay. Such debts are written off record books and recorded as general expenditure and banks need not publish these. This clause has been exploited to the hilt by the Indian industrial and business class to conceal their loot of bank funds.

For this modus operandi to become clearer, we have to go a bit deeper into the structure and administration of banks. When banks were nationalised in 1969, a National Banking Corporation and a separate banking service were proposed to develop the necessary human resources to administer the banks. Instead the government chose not to disturb the old bureaucratic setup of these banks. When these banks were under private management, their relatives and cronies, specially trained to serve their business houses, were in the top echelons of all these banks. Besides the board of management of each bank was to be reconstituted with directors drawn from the public. ‘Drawn from pubic’ was a euphemism because only politicians, industrialists and other businessmen found their entry into the board under the pretext of ‘social service’. Thus it was found that persons from industrial houses like Tatas, Birlas, and Singhanias etc. had enough clout to serve on the boards of various public sector banks many times over.

What happens when these capitalists sit on the board of various public sector banks? They found an ingenious way to siphon off public money. That was done in two ways. One to promote loyal officers to key positions in banks and shelter them so that they could sanction any amount of loan. Second, to siphon off money through loan write-offs.

If politicians and industrialists can loot bank money, why not bureaucrats?

This sounds logical. Isn’t it? But for a government official, say a secretary, or a manager of a PSU, or even a minister holding office, loans cannot to be doled out just like that. They have to take permission first to raise credit from outside sources. Hence, a novel way was found in all the banks. Gold card and silver card schemes were introduced after 1980. These cards were handed out to top bureaucrats. The holders of these cards can raise loans in any branch of these banks in India up to a certain limit. These will be accounted and monitored centrally at the head office. Here lies the catch. These loans are not to be monitored by the branch managers. What happens to these loans, who repays them, and ultimately, who waives these repayments are all secret. They could be submitted only to the respective boards.

Let us cite one example. Smt.Basawarajeswari, who owns hundreds of acres of benami land in Raichur district of Karnataka, was a central minister. She raised a loan of Rs. one lakh and did not repay. After her stint as minister was over, she submitted that she had no means to repay. Hence the Canara Bank board waived her loan. At that time, the workman director Mr.Vasant Rai, President of Canara Bank Employees Union, recorded his dissent.

How much was the loot?

1. Harshad Mehta — Rs.812 crore

2. Hindustan Photo Films — Rs. 395 crore

3. Mangalore Chemicals and Fertilisers - Rs. 165 crore

4. JK Synthetics — Rs. 87 crore

5. Hyderabad Allwyn — Rs. 85 crore

6. HMT — Rs. 77 crore

Here, we have consciously chosen these few examples in this mixed list. It has the names of public sector, joint sector, and private sector companies. What a public sector company like HMT to do with the loot of the public sector banks?

The modus operandi is complex. HMT supplies commodities to a trader under a Letter of Credit. The trader, after receiving the goods, vanishes and cannot be traced. So a liability exists with HMT. In a joint sector company like Mangalore Chemicals, the goods are hypothecated to a bank. Meanwhile the expiry date for chemicals is over and the goods become worthless. Hence the loan is outstanding. But the same chemicals are purchased by private chemical factories in a bid and profitably used. But banks write off their loan.

There were no professional heads for banks

Professional men and women were seldom put in charge of public sector banks. You do not find a single chairperson in any of these public sector banks who innovated new programmes, instruments, policies etc. to suit Indian requirements. On the other hand, you find people like Ratnakar of the Canara Bank and Gopalakrishnan of the Indian Bank who made it to the top by serving their political masters. These people exemplify how vested interests promote young and aspiring officers to top positions and how these men, in turn, served their mentors loyally. Ratnakar was hailed as a young banker who achieved impossible targets. He was also credited with waking up the entire banking industry to modernity. He ended up in CBI’s dragnet as the most notorious crook ever known in banking circles. Similar was the fate of Gopalakrishnan, the protégé of Moopanar. Year after year his term was extended as chairman of the Indian Bank. He is now cooling his heels in jail on criminal charges.

These two characters constitute only the tip of the iceberg. Hundreds of chairmen and managing directors have been promoted and utilised by the industrial class for their own growth at the expense of public money in banks. After 1975, politicians started looting banks in a big way. Indians have not forgotten Janardhan Poojari who was a deputy minister for finance. He boasted that each family in his home constituency of Mangalore had got a loan from public sector banks. He started loan melas to hoodwink the masses. His real intention was to conceal the loot of bank resources by politicians. Bank managements willingly obliged the minister and the Congress got the votes in the subsequent elections. And all those loan mela loans were written off. How ridiculous it is to ensure that each family in a parliamentary constituency is given a loan! But it was hailed by bank chairmen and sections of the media as the largest experiment in social banking. No wonder it ended up a flop.

The unions in the banking sector

There was a time when in international labour conferences, leaders from the West would enquire how the bank employees union in India was so strong. Nowhere in the world the professional workers (clerks, typists, peons, and even officers) are so well unionised as in public sector banks in India. They used to wonder how the while-collar employees in India (bank employees being a major segment among them) were so united and strong, with a class approach.

AIBEA — All-India Bank Employees’ Association — organised the employees under a broad left agenda. Its founding conference in 1946 passed a resolution calling for bank nationalisation. AIBEA had such towering leaders like Comrade Parwana and Dr.BN Pandey. The latter was a staunch Congressman and was also Governor of Bihar for some time. Comrade Parwana, who sacrificed his life for bank employees, was popular among the Hindi-belt leaders.

But now all is not well with the AIBEA. While the top leaders were/are members of the CPI, the general members were left to shout only slogans and say hallelujahs to leaders. Nothing was done to educate ordinary members. It is surprising that a union which boasts of 7 lakh membership does not have a TU school to train its own leaders and cadres. We find that every union affiliated to the AIBEA having leaders who are well past 70 years of age. It is astonishing that a man who was a principal office-bearer in 1947, and represented the union in all important tribunals, continues to be the general secretary, even after 54 years. The second rung leaders do not have any say in the affairs of AIBEA, where dictates of the elders prevail. This has also encouraged career-seekers in the unions. The directorship is the principal aim of these career men and women. The gap between members and leadership is so wide that many do not know who their leaders are. These members respond to strikes only when they are for their economic gain. And there is total lack of coordination between the party (CPI) and the union leadership. CPI leaders have gone on record saying nobody can control AIBEA or its leaders. Such centrifugal tendencies of bureaucratic trade union leaderships are justified by this party in the name of ‘autonomy’ of the trade union from the communist party.

All other unions put together do not exceed even 10% of the total membership of the AIBEA. AIBEA directors sit on the board in all but two nationalised banks. The CPI(M)-led BEFI made tall promises. But they did not contribute either to the ongoing discussion on the orientation of the bank employees movement in the face of globalisation challenge or to activising the membership. All unions other than AIBEA have low credibility because they opposed the pension agreement of the AIBEA and called upon the membership not to opt for it. Many members obliged. Less than 50% opted for pension. They said that pension as a third benefit is a matter of principle. But all the leaders of these unions opted for the pension scheme themselves while advising the members to do otherwise. Under the current VRS scheme being offered in the banks, those who had opted for pensions would earn more by opting for VRS than by continuing in service! Hence all these splinter unions are now in the forefront in demanding that the government should give one more opportunity for the employees to opt for pension. So much for their ethics and commitment for principle

The VRS and the pension scheme

Seven years ago a great debate was raging among the bank employees. It centred on accepting pension as the second benefit (along with gratuity) or third benefit (along with gratuity and PF). AIBEA favoured accepting it as a second benefit. All other unions demanded that pension be introduced as a third benefit instead of as a substitute for PF. Both sides made claims and counter claims in support of their positions and rolled out realms of circulars and statistics. Interestingly, while the other unions were making high-sounding sectarian claims, the AIBEA also tried to justify its pragmatic positions with circulars and tables full of factual and calculation errors. There was a fundamental flaw in their assumption that there would be full neutralisation for price rise under the pension scheme. Only the calculations were based on the rate of inflation at the macro-level. What they ignored was that the consumers price index would increase even when the rate of inflation on the whole remains constant. This clearly showed that one of the largest and well-endowed unions in the country, whose leaders sit on the boards of many banks could not get, simple calculations correct. It was an indicator of bureaucratic careerism that has eaten into the vitals of the trade union movement. There is absolutely no democratic functioning inside the organisation of all these unions, including the AIBEA. This is the reason why the employees have lost confidence in all these unions. They were getting neither the DA as projected by the AIBEA nor PF as projected by other unions!

Today, all the unions put together — despite their oneupmanship — are yet to come up with a fitting response to privatisation and inspire confidence in the employees that it can be stalled. But the coming catastrophe is all too visible for the employees who fear large-scale transfers and workload increase. This is the reason for overwhelming response to the VRS in various banks. But the VRS benefits only a section of employees who have put in certain years of service and in addition who had opted for pension. Rest of the employees who constitute the overwhelming majority will bear the brunt of privatisation in the form of branch closures, transfers, and additional workload due to reduction in staff strength etc. Often the members are just withdrawing from the unions. The two recent strikes have however brought about a change in the mood. The decisive battles, however, are to be joined in the days to come. But, as Robert Browing wrote in a poem,

“Turning and turning

In a widening gyre

The falcon does not hear the falconer...”

The Janata interlude

It is not that the Congress government alone was to blame for public sector banks’ losses. The then Janata government also squeezed the banks dry for their votebank politics. The Rural Debt Relief Scheme introduced by VP Singh frittered away more than Rs.60,000 crore of bank money, benefiting mostly kulaks. That this money was compensated through budgetary allocations was an eyewash. Only the principal was compensated. The interest (i.e. earnings for banks) was completely lost. Not only that; the banks had to finance the same defaulters again, causing great disruptions in the credit-delivery system. Through the ‘debt relief’ scheme, the people were given an impression that they need not repay the loans and they could keep dodging until a favourable government came to their rescue. The recovery percentage in every bank dropped by 30%. Thus, an instrument of economic and social change was used as a broom to sweep votes into political kitties. All these developments had a backlash on the morale of the bank employees. Professionalism took a beating.

We talked about political interference in the appointment of chairmen and board of directors. After 1980, the political interference, which started as loan mela, expanded further. This political interference (patronage) was institutionalised in the arena of investments in stock exchange. Sagging fortunes of favoured industrial companies was boosted up by directing banks and other institutional investors to buy their shares. A separate class of operators began to thrive on this mode of conducting business. A few became experts and built their empires. Ambanis are one such example. Even when there was no production in their plants, even where production had yet to start, their shares were boosted up. Ambanis could literally sweep money. They symbolised the resurgent new class of operators who twisted and turned the financial system to their own advantage.

RBI — the real culprit

We have been saying that public sector banks have many in built ills. Unless these are remedied by public control, the banks cannot discharge the role they were intended to. Who has to bell the cat? Whether the trade unions, which make news only at the time of national strikes, can do it? In banking industry, there is a system of workers’ representation on banks’ boards. Their number is restricted to one from the employees and another from the officers. They are an insignificant minority in the board. There are two directors from the RBI and one from the ministry. Apart from chairman, the government has totally four people to implement its concerns. Also, the RBI has a mandatory role to inspect, intervene and direct the bank managements in their day-to-day affairs.

Hence, if banks have written off huge loans benefiting businessmen and industrialists, none is aware of it better than the RBI. But in none of its reports, documents or studies, the RBI has scrutinized this. The only reason being excessive control of the government over the RBI which turns a blind eye to what is going on. The RBI is the watchdog. Hence if there is one real culprit for the banks’ ills, it is the RBI. The RBI is such a Kumbhkarna that it never knew the shady dealings in stock exchange scam until a reporter pointed out the untallied accounts of the State Bank of India and the stock exchange in clearing cheques.

As on date, Rs.30,000 crore of public money has evaporated in Harshad Mehta stock scam. The then Finance Minister Manmohan Singh was on record saying that it was a ‘system failure’. He never acknowledged the cheating or looting of the public funds. In any other country, the likes of Mehta would be behind the bars. But today Mehta is a columnist in The Times of India and advises on stock markets.

If there could be a parliamentary probe into the discharge of duties and responsibilities entrusted to the RBI by the Constitution, many of its governors would be denounced for their treachery. Today they hold respectful public offices like governors in states. The system, of course, doesn’t ‘fail’ them.

Liberalisation and the no-holds-barred loot

The period of liberalisation was the period of no-hold-barred loot of public money. Side by side, the politicians started talking of reforms and restructuring etc. They glorified Asian Tigers and wanted India to emulate them. Every finger was pointed to the buoyant share markets. The stock market index became synonymous with progress. The media too joined the bandwagon. And then there was the crash. The public sector banks lost Rs.30,000 crore in the Harshad Mehta scam.

What was being deliberately overlooked was the fact that liberalisation, and the consequent reforms, came to India after being experimented in dozens of countries all over the world and everywhere it was an utter failure. It did not generate the promised wealth for the broad masses. But it increased the wealth of speculators, investors and currency traders; in short, the owners of hot money.

The decade of 1980s saw a sea-change in the international economy. Globalisation became the buzzword. At the same time, advances in communication technology were utilised to the hilt by those who propelled globalisation. They controlled so much hot money that they could wreck the economy of any nation. India could not resist the onslaught and had to dismantle its protective barriers to money flows, money changing, money transfers and trade etc.

Western governments and bankers met at Basle and declared that a minimum of 8% capital adequacy was necessary for banks to do business in international markets. This means no matter how large a bank is or how much public confidence it commands in India, it is unfit to open an international letter of credit or engage in forex trade etc., unless it has a capital adequacy ratio of 8%. None of the banks in India except the SBI meets this criteria. Hence came the Narasimham Committee to suggest ways and means of enabling the banks to meet the Basle conditionalities and the Committee came up with sweeping recommendations. Now banks have to be merged to have a larger capital base. The financial sector liberalisation spearheaded by WTO under the garb of opening of financial services included privatisation and disinvestment of government holdings. The WTO also imposes a whole lot of conditions like withdrawal of subsidies (soft-interest loans etc.) and even manpower limitations. They even have targets fixed for years to come. India, having signed the WTO agreement without even a discussion in the parliament, is now duty-bound to implement them.

Gone are the ideals of nationalisation. Gone are the democratic capitalist ideals of unshackling the small producer from his debt burden. Gone too are the concepts of welfare state. The banks cannot survive this onslaught. But one should have hope. Our only hope is to build workers’ struggles to stop this slide.

Before and after nationalisation
Before 1969	After 1999
Total branches 8262	45,698
Staff 2,20,000	9,65,720
Deposit Rs.4665 crore	Rs.7,31,000 crore
Credit to agriculture Rs.162 crore	Rs.4,46,496 crore
Priority sector lending Rs.441 crore	Rs.53,197 crore
2% of total branches were in rural areas	40% of branches are in rural/semi-urban areas
Bank deposits siphoned off to industrial houses as cheap credit	A greater portion of deposits are channelised to rural credit
One hundred bank directors were also sitting directors in about 1000 companies	This figure came down drastically
No reservation for SCs & STs	Reservation/roaster policy implemented in full
Public money siphoned off through benami landing	Public money siphoned off through loan write-offs
Names of defaulters and those whose loans were written off not for public scrutiny under banking secrecy	The same is the situation even now. The banks are not answerable to the Parliament. Comptroller and Auditor General has no jurisdiction over government bank accounts shrouded in secrecy.
Politicians-owners nexus was absent. But there was patronage through donations.	Interference and manipulation by the politician-industrialist nexus in full swing. In some cases, (like Janardhan Poojari) bank loans were used to garner votes.
Public money was safeguarded through Deposit Insurance Corporation	The Deposit Insurance Corporation was abolished.