banking sector reforms - retrospect and directions for future

8/12/2019 Banking Sector Reforms - Retrospect and Directions for Future

http://slidepdf.com/reader/full/banking-sector-reforms-retrospect-and-directions-for-future 1/98



anking Sector Reformsanking Sector ReformsBanking Sector Reforms etrospect and Directions for Futureetrospect and Directions for FutureRetrospect and Directions for Future

A I B O CTamilnadu State Unit



All INDIA BANK OFFICERS' CONFEDERATION

[Tamil Nadu State Unit]C/o. SBI Officers' Association (CC),State Bank Buildings,

# 84, Rajaji Salai,Post Box No.1992,Chennai – 600 001.

All Letters to be addressed to the Secretary:th

To All E.C. Members / Members: 5 April2014

Dear Comrades,

“With all their faults, trade unions have done more for humanity than anyother organisation of men that ever existed. They have done more fordecency, for honesty, for education, for the betterment of the race, for thedeveloping of character in men, than any other association of men”

– Clarence Darrowth

We are glad to bring out this booklet during this time of the 16 GeneralElections for wide discussion among all for the betterment of the citizens

of the country. It contains our thoughts on the impact of Reforms in theBanking Sector and our alternatives, a note on ve day week which is thedream of every bank employee, the need for rejection of attempts tointroduce cost to company in the Banking system, the alternative to theRBI's policy on Banking sector and excerpts from a visionary speech ofDr.Victor Lewis Anthuwan.

This booklet should be read by every comrade in the Banking sector sothat our vision is translated into action. This should be presented to

politicians and policy makers and we should pursue the demands till theyare achieved.

Our State Committee appeals to you to revitalise the district committees atthe earliest.

Together we will achieve our goal. Our Unity Long Live.

“A wise and frugal government, which shall leave men free to regulatetheir own pursuit of industry and improvement, and shall not take from themouth of labour the bread it has earned – this is the sum of goodGovernment” – Thomas Jefferson

VIJAYASENAN P. D. THOMAS FRANCO RAJENDRA DEVPRESIDENT GENERAL SECRETARY

Banking Sector Reforms 1

Telephone : 2522717025228773

Fax: 25261013Telegram :“SUPSTAFF”

E-mail: [email protected]




Charter of Demands - Highlights 89

CONTENTS

Appeal to the Political Parties and Policy Makers 3

Banking Sector Reforms 6– Retrospect and Directions for Future

Note on Five Day A week & Regulated Working Hours 57

Note Opposing Cost to Company 61

AIBOC’s response to RBI’s Discusion Paper on 65“Structure of Banking in India - The Way Forward”

Current Economic Scenario and Challenges of 83

the Banking Sector



Provide Autonomy to Public Sector Banks and focus onsocial Banking & Development Banking. Notional cost ofsocial banking should be taken into account whileassessing their performance.

Stop giving Bank licences to Corporates taking intoaccount the recommendations of various committees andthe vested interest they may serve.

Take Action on Corporate Bank defaulters – Publicise theirnames and initiate action against the major share holders

personally.

Stringent laws are to be enacted to tackle NPA menace.

Implement 5 day week in all sectors including BankingSector taking into account International experience,alternate channels of banking available and employee

productivity. Bring clear guidelines for Micro Finance and monitor

through NABARD & RBI. Micro finance bill should bediscussed with all stake holders.

Bring NBFCs and Nidhi companies under total control.They are misusing public money and depositors are atrisk. Initiate action against their misdeeds. Supervision

need to be improved. Provide autonomy to RBI and scrap the recommendations

of Financial Sector Legislative Reform Commission.

No merger of Public Sector Banks in the name ofconsolidation. Learn from the failures of many large sizebanks in US.

Nationalise old generation Private Sector Banks so that

they serve the Nation better. Stop move to hand over themto Foreign Investors

Stop outsourcing of Regular works in the interest of labouras well as the security aspects which are needed inbanking business.

Appeal to Political Partiesand Policy Makers




Provide decent wage hike to Bank Officers and employees.Today they are paid less than the Government employeesas well as private sector employees.

Strengthen Co-operatives and provide adequate supportto them. Do not interfere with their performances.

Provide adequate support to NABARD and expand its functions in rural development and rural credit.

Expand rural branch network of Banks so that underdeveloped rural areas get an uplift and real financialinclusion takes place.

Ensure full implementation of priority sector lending (45%)including 18% to Agriculture 1% to the weaker section @ 4%interest by all Banks.

Improve Rural Credit Deposit Ratio uniformly in all statesespecially in States where it is abysmally low.

Redefine financial inclusion with focus on access to creditand not just opening an account.

Stop RBI proposal to allow foreign banks to enter India ina big way as this will enable them to take over our Banks

which is against national interest.

Government of India has passed the Banking Regulation(Amendment) Bill in the Parliament neglecting the strongprotest by trade unions in the banking industry andvarious political parties. The amendment which isagainst national interest has to be repealed.

Right of participative management extended to tradeunions in Public Sector Banks should be made availableto private sector banks which will strengthen andaccelerate the growth trajectory of these Banks.

Private Sector Banks are handling public money. Theyare also regulated by RBI. The reservation policy shouldbe applied strictly to them also.

Government of India is a founder member ofInternational Labour Organization which is yet to ratifycertain conventions and treaties. Convention 87 dealing with Freedom of Association and Protection of Right to




organize and Convention No.98 dealing with Right toOrganize and Collective Bargaining are to be ratified bythe Government immediately.

Bank retirees are being denied periodic upward revisionof Pension as against the retired Government employeesand many other Organisations in which similar pensionscheme is applicable. This is highly unjust anddiscriminatory. To enable the Bank retirees to have adecent living, there is a dire need for periodic updation ofpension.

A study reveals that around 60% of gross profit of Banks

is transferred as provisions every financial year.Stringent laws and mechanisms to be put in place toarrest the menace of NPAs and place the details ofdefaulting borrowers on public domain.

Introduce women friendly promotion and transferpolicies and provide Child care leave as applicable toCentral Government employees.

Bank officers and employees working in the clearinghouses under the Check Truncation System are forced to

work seven days in a week and they are deprived ofUniform holidays. Uniform holidays should be providedto all bank employees.

The employees of RRBs perform similar functions ofCommercial Bank employees. Their Salary and serviceconditions should be similar to other Bank employees.

Recruit adequate officers and staff in Banks taking intoaccount the need for expansion and large talent poolavailable in the country which has high unemployment.

Bring back black money which is kept in foreigncountries.

Scrap new pension scheme and provide assured pension for all.

All India Bank Officers' Confederation

– Tamil Nadu State Unit




Banking Sector Reforms – Retrospect and Directions for Future

In the Name of Banking Sector Reforms !

Banking Sector plays an important role in the development of theeconomy of the country and creates impact on the lives of the people.Countries with robust banking sector have become developed economies.Agriculture, trade and industry depend on the Banking Sector for theirgrowth. As on 2013, Australia has 31.8 bank branches per one lakh population, Belgium 42.4, Brazil 47.3, Bulgaria 61.2, Canada 24.4,Cyprus 97, France 38.8, Italy 64.4, Japan 33.9, New Zealand 33.3, Spain85.1, Switzerland 48.8, United States 35.3 whereas India has only 11.4

branches per one lakh population. Even after 67 years of IndependenceIndia remains an under banked country. Only 58% of the Indian Households and only 31% of the Indian population have bank accounts. For thecountry to ourish and become one of the leaders of the world economy,our country needs better banking facilities with the dominance of publicsector banks which alone practice social banking and cater to the lowerstrata of the society.

Now let us analyse the growth of the banking sector with a look into the

past before independence, after independence and after 1991 when the socalled reforms started , the present status and put forward our vision forthe future.

Before Independence

Before Independence money lenders had a eld day. Central BankingEnquiry Report 1929 explains how the farmers who constituted themajority were totally dependent on the money lenders who were the one'snancing inputs for agriculture, purchase the produces and had hold on

the land which was mortgaged to them formally or informally. Punjab'slegendary scholar Malcom Darling stated in 1925 that “the Indian peasantif born in debt, lives in debt and dies in debt”. The exploitation of themoney lenders who were also the land lords had made the farmer totallydependent on them in the absence of a Banking facility.

Studies have proved that rural credit always has been a cushion againstshocks like draught, ood etc. Credit is needed to smoothen out theasymmetry between the ow of earnings and cyclisity of expenditure.

Each of the basic needs of health, education, food and social security,apart from the working capital and long term investment requirements ofrural livelihood create a major demand for credit.

Before you do anything, stop and recall the face of poorest most helpless destitute person youhave seen and ask yourself, is that what I am about to do going to help him." - Mahatma Gandhi


D. Thomas Franco Rajendra Dev



EVOLUTION OF INDIAN BANKING

In a nutshell when India attained Independence in 1947 it inherited aweak, desperate and unwieldy banking structure. Other than ImperialBank of India, there were many Indian Joint Stock Banks but they did not

have adequate capital and due to unhealthy business practises 205 bankswent out of business during 1947 to 1951.

AFTER INDEPENDENCE

The Banking Companies Act 1949 was amended 10 times between 1950and 1967 trying to strengthen the banking system. As a result between1960 and 1969 there were 48 compulsory mergers, 20 voluntaryamalgamations, 17 mergers with State Bank of India, 125 transfers ofassets and liabilities, all involving 210 banks. The number of banks whichwas 567 in 1951 came down to 295 in 1961 and nally 91 in 1967.

FOCUS ON CO-OPERATIVES

The historic All India Rural Credit Survey carried out in 1954 showed thatformal credit institutions provided less than 9% of credit needs in India.Money lenders, Traders and rich land lords handled more than 75% ofrural credit. Between 1950's and 1960's a way forward was possiblethrough co-operative societies. Their share in rural credit was less than

5%. But it rose to 20% in 1971.Today India's co-operative structure has over 13 crore members including6 crore borrowers and is one of the largest rural nancial systems in theworld. Around one lakh primary agriculture credit societies can beregarded as the bed rock of India's rural economy. However the creditsocieties have never attained the enormous potential opened up by theirvast outreach because of poor governance and political interference.While they were originally supposed to be member driven, democratic,

self governing, self reliant institutions, Co-operatives have constantlydepended on Government for their basic functions. State Governmentshave become the dominant share holders, Managers, Regulators,Supervisors and Auditors. Savings and credit functions go together and provide strength to the co-operatives all over the world which has beenmissing in India. Dominance of richer people and rural elite continues inthese institutions even today.

SOCIAL ORIENTATION FOR BANKS

In furtherance of the objectives of Regional and Functional spread ofBanking, the social orientation of commercial banking was conceived inthe founding law of Reserve Bank of India itself which, as a pioneering provision, entrusted to it the responsibility of enlarging the supply ofagriculture nance through co-operative institutions or through scheduled




commercial banks. On the basis of the recommendations of the Rural banking enquiry committee (1950) for involving commercial banks inrural credit, the then Imperial Bank of India agreed to open 114 ofces inrural and semi urban areas (against 274 branches recommended) but could

open only 63 branches in 5 years from July 1951. It was thereforethought that without the states intervention, banking facilities couldnot be extended to such areas. Hence the Imperial Bank of India wasbrought under Public ownership as State Bank of India from 1955with the Central Bank (RBI) holding 92% of its shares with statutoryresponsibility to establish atleast 400 additional branches within a 5year period. It not only fullled the target but also went beyond thetargets. In September 1959, major state associated Banks of Princely

states were taken over and vested with the State Bank of India assubsidiaries numbering 7. Still weaknesses of the Commercial Bankingsystem, such as poor population coverage of Bank branches, deposits andcredit, urban concentration, vast spectral credit gaps, excess control over banks by Industrial and commercial houses, and unduly poor capital basecontinued. This led to a re orientation of the Banking System. Between1965 and 1969 social control over commercial banks was brought in bythe Government. They were

1. Introduction of the credit authorization scheme requiring banks toobtain prior authorization for granting fresh credit limits of Rs.10million or over to any single party so as to align credit policy moreclosely with the ve year plan objectives.

2. The initiation of social control scheme in 1968 with the objectives ofachieving a wider spread of Bank Credit, preventing its misuse anddirecting a larger volume of credit to priority sectors and

3. The statutory reconstitution of commercial bank boards with a

majority representation to informal sectors

This was done on the basis of the experiment in France, integratingcredit allocation with their system of indicative planning which became a success. The decade 1955 to 1965 saw a series of stepstowards building a strong institutional structure for promoting mediumterm and long term loans for industry and agriculture through publicsector. These include the nationalisation of insurance sector in April1955, setting up of an Industrial Finance Dept within RBI in 1957,administering a credit guarantee scheme for small scale industries inJuly 1960 and promotion of many industrial credit institutions. In1955, Industrial credit and Investment corporation of India wasestablished. In 1958, re-nance corporation was set up. In 1964,




Industrial Development Bank of India and Unit Trust of India were promoted. RBI also set up National Industrial Credit (Long termoperations) fund from the year 1964-65. In the sphere of agriculturecredit 2 funds were set up in 1955 called National Agricultural Credit

(Long terms operations) fund and National Agricultural Credit (Stabilisation ) fund. From out of the prots of the RBI to support theco-operative credit structure and the agriculture re nance anddevelopment Corporation was set up in 1975.

"Our principal problem will be how to eradicate poverty from our country. That will requirea radical reform of our land system, including the abolition of landlordism."

- Subhash Chandra Bose

BEFORE NATIONALISATIONnd

The Socio political environment of 2 half of 1960s reected a sense ofdisenchantment in the growing inequalities spawned by the development

process – a sense which was highlighted by a series of studies such as thereports of monopolies enquiry commission and Mahalanobis committeeon distribution of income and levels of living (1964). R.K. Hazarisubmitted a detailed report to the planning commission in September1967, wherein he stated “so long as many of the major credit institutions,are under direct control and/ or inuence of big industry and unless thelinked control of the industry and bank in the same hands is snapped, thenationalisation of banks, reducing concentration of economic power with

a few was not possible”.Besides interlocking of inuence and interests which was a bane of the banking system then, the actual operations of banks were characterized by serious inadequacies. First, the coverage of the branch network wasunduly low compared with the size of the population - an average of one branch ofce for 65,000 persons in the population, whereas thedeveloped-country norm was one branch per 8,000 population. Second,the urban orientation of the banking system was blatantly obvious. At the

end of June 1969, there were just about 1,832 (or 22.2. per cent) out of8,262 bank branches located in rural areas. Even this spread was achieved because of the accelerated branch banking policy adopted by the StateBank of India, which operated 629 branches in rural areas. Third,concentration was excessive even in urban areas. As of April 1969, therewere 617 towns without any commercial bank branch, of which 444towns were not served by any bank at all. The ve metropolitan cities ofBombay(now Mumbai), Calcutta(now Kolkata), Delhi, Madras(now

Chennai) and Ahmedabad accounted for as much as 46 per cent of total bank deposits and 65 per cent of total bank credit as at the end of 1967.




Fourth, the most disconcerting aspect of the banking structure was thesectoral distribution of bank credit. The share of agriculture in total bankadvances in 1951 was 2.1 per cent; and even this gure had declined to0.2 per cent by 1965-66. After the move to impose social control, it edgedup to 2.1 per cent in March 1967. In the case of industry, on the otherhand, its share off bank credit rose from 30.4 per cent in 1949 to 52.7 percent in 1961 and further to 62.7 per cent in March 1966. Fifth, thenancial stake of the shareholders in banks was almost negligible. Formajor banks, paid-up capital had constituted just about 1 per cent of total bank deposits. Finally, professionalisation of the banking cadre and thesystem of training for that left much to be desired resulting in a seriousshortage of trained, qualied and experienced professional managers.

Overall, an essential feature of the banking system appeared to benancial exclusion.

OBJECTIVES OF BANK NATIONALISATION

In many countries in Europe, banking development in the post-war yearswas noteworthy in that it took account of the vital differences between banking and other industries. Recognising the sensitive nature of the banking industry, many countries with predominantly capitalist

economic structures thought it t either to nationalise their banks or tosubject them to rigorous surveillance and social control. France, Italy andSweden were typical examples in this respect.

Thus, the environment, motivation and rationale for the nationalisation of banks existed and justied the action in 1969. The declared objectives ofnationalization were: (i) wider territorial and regional spread of the branch network; (ii) better mobilisation of nancial savings through bankdeposits; (iii) re-orientation of credit deployment in favour of small and

disadvantaged classes all along the production spectrum; (iv) removal ofcontrol by a few business houses (and that too with microscopic capitalstakes), (v) the conferring of a professional bent to bank managements,and (vi) the provision of adequate training and reasonable terms ofservice for bank staff. It bears stating that public ownership of banksserves a number of overarching objectives. By subordinating the protmotive to social objectives, it allows the system to exploit the potentialfor cross subsidization, to direct credit to targeted sectors, despite

differential costs, and disadvantaged sections of society at differentialinterest rates. This permitted the fashioning of a system of inclusivenance that could substantially reduce nancial exclusion. And by givingthe state inuence over the process of nancial intermediation it allowedthe government to use the banking industry as a lever to advance the




Nationalisation – A move forward

14 of India's largest scheduled commercial banks were nationalized in1969. The RBI now acquired a more direct and activist role in deciding banking policies with "a larger social purpose" and the need to "servenational priorities and objectives such as rapid growth of agriculture,

small industries and exports, raising of employment levels,encouragement of new entrepreneurs and development of backwardareas".

The 1961 Census showed that nearly 50 percent of India's towns andalmost none of our villages had bank branches. In 1969 not even 1 percent of India's villages were served-by commercial banks. Whileindustry accounted for a mere 15% of national income, its share incommercial bank credit was nearly 67%. On the other hand, agriculture

that contributed 50% of GDP virtually got nothing from banks.

development effort. In particular, it allowed for the mobilization oftechnical and scientic talent that could deliver both credit and technicalsupport to agriculture and the small scale industrial sector. Thismultifaceted role of state-controlled banking was also conceived to be asupply-leading one with emphasis on building a nancial structure inanticipation of real sector activities, particularly in underdeveloped andunder-banked regions of the country.

In the circumstances, any attempt at signicantly altering the deploymentof commercial bank credit required purposeful action on three fronts: (i)rigorous control over the pre-emption of credit by the medium and large-scale industries and also by the private trade; (ii) positive policies andinstruments for directing credit in favour of the designated 'priority'areas; and (iii) the development and maintenance of a sound frameworkof instruments and institutions to full those objectives. Thenationalisation of banks was expected to vastly speed up branchexpansion; help mobilise deposit resources from all parts of the countryand from all sections of the people; meet diverse production needsirrespective of size, assets and the social status of borrowers; create freshopportunities for backward areas; and nally, ensure that large borrowersdid not have more access to the resources of the banks than was actuallyrequired for productive use and to prevent the use of credit forspeculative and other unproductive purposes.

"It is but equity...that they who feed, clothe and lodge the whole body of the people, should havesuch a share of the produce of their own labor as to be themselves tolerably well fed, clothedand lodged."-Adam Smith, The Wealth of Nations, 1776




Reaching out to Unbanked Areas

The RBI created a comprehensive list of unbanked locations in India thatit circulated every few years to all banks. In 1970, the RBI made its rst"socially coercive" licensing policy. For every new branch in an already banked area (with one or more branches), each bank would have to openat least 3 branches in unbanked rural or semi-urban areas. In 1976

Regional Rural Banks (RRBs) were created. RRBs were set up to developthe rural economy by providing "credit and other facilities, particularly tosmall and marginal farmers, agricultural labourers, artisans and smallentrepreneurs”

The number of rural branches of banks (including RRBs) increased from amere 1443 in 1969 to around 35,000 in the early 1990s. Most of thisincrease was in unbanked areas. The number of banked locations rose inthis period from around a thousand to over 25,000. The share of rural

branches went up from 18 to 58 percent during the same period.Another major impetus to rural credit was provided by the establishmentof the National Bank for Agriculture and Rural Development (NABARD)in 1982. NABARD was set up as an apex Development Bank with amandate for facilitating credit ow for agriculture, rural industries and allother related economic activities in rural areas

In order to ensure that rural deposits were not used to just increase urbancredit, the RBI directed that each rural and semi-urban bank branch had to

maintain a credit-deposit ratio of at least 60%. Between 1969 and 1987,rural credit as a proportion of total credit went up from 3 to 15 percent.Rural deposits as a share of total deposits went up from around 6 to over 15 percent. The credit- deposit ratio went up from under 40 percent in 1969 tonearly 70 percent in 1984 and remained over 60 percent until the early1990s. Now it has raised to 78% overall but rural credit is still low.

Priority Sector Lending

With a concern of credit not reaching to weaker and unreached sector, theRBI came up with Priority Sector Lending

Nationalization was aimed at redressing these inequities. Banks needed alicense from the RBI if they wanted to open a new branch. Afternationalization, branch expansion was deliberately directed towards previously unbanked or under-banked rural and semi-urban areas. In

1980 6 more banks were nationalized.

Every palace that one sees in India is a demonstration, not of her riches, but of the insolenceof power that riches give to the few, who owe them to the miserably requited labours of themillions of the paupers of India. - Mahatma Gandhi




Other than directing credit to hitherto unbanked geographical regions, theRBI also tried to inuence the sector of bank lending. In 1972, certain"priority" sectors were identied. These included agriculture and relatedactivities and small-scale and cottage industries. A target of 33% lending

to the priority sector was set in 1975. In 1979, the target was raised to 40%.In 1980, sub-targets were set: 16% of lending was to go to agriculture and10% had to be targeted to "weaker sections". The share of priority sector intotal credit of commercial banks went up from 14% in 1969 to around 40% by the end of the 1980s. The share of agriculture had reached 19% by 1985and remained around that gure until 1990. The number of agriculturalloan accounts increased from around 1 million in the early 1970s to nearly30 million by the early 1990s. Within agriculture, 42% of the credit went

to small and marginal farmers.Ceiling on Interest Rates

Perhaps the most important measure of social coercion used by the RBIwas to x ceilings for every size-class of loans for the various prioritysectors. The scheme for providing cheaper credit to weaker sections wasstarted in 1974. For this a ceiling of 4 percent interest per annum wasxed. Banks had to provide 1 % of their total loans within the prioritysector at this rate. In 1978, the RBI directed commercial banks and RRBs

to charge a at rate of 9% on all priority sector loans, irrespective of size.Immediate payments were not to be mandatory for small rural borrowers.It was clearly recognized that cost of credit, rather than access, was thekey constraint facing the rural poor. After all, the local moneylenders wereall over the place but the way they operated created more problems for thevulnerable rural population.

In 1954, Pandit Jawaharlal Nehru had described public sector enterprises (PSEs) as 'templesof modern India'. PSEs were conceived as instruments to bring socio-economictransformation of the country. Those were the mainstay for self-reliant growth. Someimportant objectives were to create infrastructure, absorb technology, encourageinnovation, generate employment and achieve certain social objectives.

FRUITS OF NATIONALISATION-GROWTH, GEOGRAPHICAL

SPREAD AND FUNTIONAL REACIIBank nationalisation and the associated public policies on banking andnancial sector development were thus predicated on the strongassumption of the need for promoting nancial intermediation by building institutions, expanding their geographical spread, mobilisingsavings, and ensuring a better regional, sectoral and functional reach ofinstitutional credit in India. Such a system of supply-driven institutionaldevelopment ·could neither be left to market forces nor to the initiative




of private entrepreneurs. Also, the broad objectives of banking, as setout above, were intertwined, for one could not be achieved without thesuccess of others. The functional reach of credit, for instance, could not beattained without the geographical spread of banks as well as mobilisation

of local savings.

Even the ardent critics of India's growth strategy would admit that whatthe country achieved in the area of nancial sector development beforethe present reform process began, particularly after bank nationalisation,was unparalleled in the nancial history of any other nation in the world.The presence of nearly 62,000 Commercial bank branches in the country,of which over 35,000 (or over 58 per cent as of March 1991) were in ruralareas, within a short span represented an unprecedented growth ofcommercial banking in terms of both geographical spread and functional

streach. As on 31 March 2013, there were 102343 Bank branches of which37953 (37%) were in rural areas, 27219 (26%) in semi urban areas, 19327in Urban centres and 17844 in Metros. Still average Bank Br per oneLakh population is only 10.4. Apart from commercial and co-operative banking, the vast network of term- nancing, investment-and insuranceinstitutions promoted at the all-India, regional and state levels can only beconsidered as novel, innovative and forward looking. The rapidity with

which and the diversied manner in which they grew, the condence,stability and certainty that they imparted in savers' minds, and the societal perspectives which guided their initial operations, were all made possible because the banking and nancial system was primarily in the publicsector and not controlled by a few industrial houses and also not subject tothe vicissitudes of the market place. The system has, therefore, promotednancial intermediation of a high order and nurtured a vast army of banking personnel, pushed up household saving in nancial assets,

extended vast investment and inventory credit to medium and large-scaleindustries in the private and public sectors but without the industry- banking interlocking that characterized the system earlier, promoted newentrepreneurship, and also attained extensive credit reach to severalmillion borrowers hitherto neglected, especially in agriculture, small-scale industry, small business and other informal sectors. Thedevelopment of varied institutions and instruments with vastdiversication of the money and capital markets have been the hallmark

of the post- nationalisation period.Second, combined with the expansion of the bank branch network, steadyincreases were recorded in the share of rural areas in aggregate depositsand credit. From 6.3 per cent in December 1969, the rural deposit sharetouched 15.5 per cent in March 1991 and the credit share rose from 3.3 per




cent to 15.0 per cent. More signicantly, with the target credit-deposit(C-D) ratio set at 60 per cent, the C-D ratios of rural branches had touched64-65 per cent on the basis of sanctions. In fact, if migration of bank creditfrom the place of sanction to the place of utilization is taken into account,the C-D ratio for rural branches had ranged from 85 per cent to 97 per cent

st by March 1991. As on 31 March 2013, the CD Ratio has reached 72.7%of which Rural is still 59%, semi urban 51.8%, Urban 58.8% and Metro84.9%. So the Deposits collected in Rural and Semi Urban areas are usedto nance the metro customers.

Third, three historically underbanked regions, also underdevelopedeconomically, namely, north- eastern, eastern, and central regions, had

received special attention in the branch expansion programme ofscheduled commercial banks until the 1990s. These three regionsaccounting for about 50 per cent of the country's population, had about 25 per cent of bank branches in 1969. By March 1992, their proportion of bank branches had shot up to 42.6 per cent and the number from a total of2,068 branches to 26,439. Alternatively, the proportion of bank ofceslocated in relatively under-banked states or BIMARU states improvedduring the period from 23.0 per cent to 34.0 per cent. This improvement isalso reected in a sizeable reduction in the average population covered by each bank ofce in the under-banked and moderately-banked states.Besides, it is in these backward states that the shift in the share of bank branches in favour of 'rural' areas has been much more pronounced.Another factor which is claimed in ofcial circles to have contributed toan improvement in C-D ratios of regions and states has been the banks'effort to supplement bank credit by investment in securities and bonds ofstate governments and state-level institutions like electricity boards,improvement trusts, local boards and others. This occurred to a greaterextent in underdeveloped states than in the relatively developed states.

Fourth, the improvement in banking development in the post-nationalisation period was reected in a large number of districts sportingnoticeably higher growth in bank deposits, higher credit growth andimproved C-D ratios. A classication of all the districts in the country andtheir rural branches by the size of their credit-deposit ratios conrms the phenomenon of a growing number of districts in various regions having

experienced noticeable improvements in their ratios of credit to depositsuntil the beginning of the 1990s. The number of districts enjoying C-Dratios of 60 per cent and above shot up from 136 in March 1980 to 209 inMarch 1985; thereafter it remained in the range of 163-177 until March1992. Such improvement took place in rural centres of districts too.




Fifth, sectorally a major achievement of the banking industry in the 1970sand 1980s was a decisive shift in credit deployment in favour of theagricultural sector in particular. From an extremely low level at the timeof bank nationalisation, the credit share of the sector had movedto nearly 11 per cent in the mid-1970s and to a peak of about 18 per cent atthe end of the 1980s which was the ofcial target set.

Sixth, next to agriculture, the small-scale industrial sector occupies a pivotal position in terms of employment and output share in theeconomy. Apart from sectoral dispersal and wider promotion ofentrepreneurship, the small-scale industries have a regional dimension inthat the SSI units are scattered all over the country. Immediately after the

introduction of social control and subsequent bank nationatisation, banksfound the small-scale industries a lucrative target for lending. Hence theshare of SSI units in total bank credit shot up from 6.9 per cent in June1968 to 12.0 per cent in June 1973. Thereafter, the share was sustained inthe range of 11 to 13.5 per cent until the early 1990s.

Finally, data on the trends in the number of borrowal accounts - overalland small borrowal accounts - are reective of a similar positive trend.Immediately after bank nationalisation and for the next two decades,

there occurred an upsurge in small borrowal accounts. BetweenDecember 1972 and June 1983, there were 21.2 million additional bankloan accounts nursed by the scheduled commercial banks, of which 19.8million or 93.1 per cent were accounts with credit limits of Rs 10,000 orless. This trend continued for another decade up to March 1992 (despitethe loan waiver scheme effective March 15, 1990).

With a view to taking account of the impact of ination, the cut-off limitfor small borrowal accounts in the RBI's reporting system was raised to

Rs 25,000 in December 1983. Between December 1983 and March 1992when there were another 38.1·million of additional total bank accounts,the number of small borrowal accounts with credit limits of Rs 25,000 orless increased by 36.0 million or almost 95 per cent of the total increase

This ability of the scheduled commercial banks to service small borrowalaccounts - a peak of over 62.5 million with credit limits of Rs 25,000 orless from various sectors and regions of the economy, could be said to beone of the outstanding achievements of bank nationalisation. It is this

aspect of banking development that aroused the aspirations of thecommon man and gave him a sense of participation in the development process.

First bread and then religion …. I do not believe in a God who cannot give me bread here, givingme eternal bliss in heaven .” Swami Vivekananda




Share of FDI in Private Banks to be raised and bringing NationalisedBanks under Companies Act.

Proportionate voting rights to the shareholders.

New banking licenses to industrial and corporate houses.

Phase out priority sector lending.

Huge outsourcing of Bank's jobs, though permanent and perennial innature.

Promote Asset Reconstruction companies.

Amendment of Banking Laws accordingly.

Reduction of staff strength sharply.

Banking Laws (Amendment) Act. 2012:

Within this policy frame work the Banking Laws (Amendment) Act 2012has been introduced. This would facilitate - (i) merger of Public SectorBanks, (ii) takeover of Indian Banks by foreign entities, (iii) dilution ofGovernment share holding through further issuance of share, (iv) provideample scope to the Private Shareholders to tighten grip over functioningand policy decision of Public Sector Banks, (v) entry of new banks in private sector.

Merger of Public Sector Banks:

As an integral part of nancial restructuring, merger of public sector banks is the new target of the government. With the argument that toenable Indian banks to compete in the global banking system they have tohave enormous size and strength and for that they propose that merger andconsolidation is the way out. We are apprehensive that such merger wouldclose many bank branches and reduce their staff. The close relation between bank and its clients would be lost. The big banks wouldessentially serve the elite customers and corporates. Given the craving of

the government for international capital the situation might lead to takeover of our banks by multinational mega banks.

Bank Licenses to Corporates:

I think, the real problem in the financial sector is issues of conict of interests. And when you havecorporate opening their won banks, you are opening a venue for conict of interests. “ – Joseph Stiglitz

Despite RBI's reservations the government has pressed the former toinitiate the process. The Standing Committee on Finance, under theChairmanship of Shri Yashwant Sinha has unambiguously opposed themove as licensing the corporate may lead to misuse of bank's fund. Earlierrenowned economist Joseph Stiglitz and even the IMF had opposedgiving license to corporates, fearing it might lead to conict of interest anddefeat the very purpose· of the course. The earlier record in this regard had




been adverse. In 1993 around 11 private banks were given license. Most ofthe banks - such as Global Trust Bank, Centurian Bank and Times Bankhad to close their shutters. The banks in India are mainly repository ofhousehold savings. The corporates are main borrowers. Obviously, their

becoming owners of the banks could lead to misuse of funds. The UnitedForum of Bank Unions has expressed its deep resentment against issuingof licenses to corporate.

Before we go into the effects of these so called reforms, let us have alook at what has happened in the global nancial system with focus onthe US nancial crises.

LESSONS TO BE LEARNT

International Financial Crisis: The onset of nancial and marketglobalization was considered to bring magical deliverance to the poor andweak economies of the developing nations. This belief was aided andabetted by the worldwide media campaign and the huge growth andexpansion of Information Technology. The focus and thrust of theeconomy shifted from real sector to supercial speculative domainthat basically dealt in asset transfer and phoney transactions. Theeasy availability of nance and credit, the spurt in consumerism, and mass production and marketing of electronic gadgets, the unprecedented use ofadvertisement and expansion of entertainment and leisure industry lentcredence to this belief. However, in quick succession came the realizationthat the process has facilitated the market take-over by the internationalnance and corporate houses who would share a part of their booties withtheir local counterparts. The drive was piloted by the US and theWashington based international institutions.

The national governments were made to acquiesce in and legalize the loot.Right-wing economists and academics produced voluminous literature to justify the shady process. State intervention in the economy wasdesecrated. Free market became the mantra of the day.

The dubious process made atrocious transfer of wealth in the hands ofcorporate and nancial magnets. Public money was plundered and offeredto private agencies. National economies were vandalized. Under themonstrous pressure of the international nance capital, national parliaments were bent to pass legislations curbing their own economic

sovereignties.The so called Meltdown was tailor made. The Sub-prime lending wasdeliberately made. Since there was huge demand for housing, loans weregiven to the parties without verication of identity and repaying capacity.These loans were securitized and such securities were sold out to all and




sundry. All the participants in these transactions, the mortgage companies,the banks, the insuring agencies knew pretty well that the innate quality ofthe products they were selling were worthless. What they did was todistribute the risk worldwide. Thus the crisis was made global. The

governments and the central banks remained mute spectators to thisunholy arrangement. One of the prime factors behind this apocalypsewas serious disruption of banking norms and practices and reducingthe central banks to mere governmental tools in the United States andEurope subsequently. This had resulted in collapse and bankruptcy ofmost famed and largest banks, mortgage lending institutions andinsurance companies of the world. Along with them innumerable nancialinstitutions were ruined. More than 400 banks have collapsed in US.

European Debt Crisis: The International Finance Crisis turned in late2009 into a Sovereign Debt Crisis in Europe. Huge sums were provided byvarious governments out of their public exchequer to bailout themultinational banks and corporate houses. On the other hand they cutdown or withdrew the social welfare schemes and social securitymeasures which made peoples' lives more miserable and further reducedthe health and the growth of these economies. The European Debt crisiswas the result of economic recession, falling government revenues

coupled with corporate and bank bailouts by the state exchequer.Sovereign Debt default became reality for certain countries and loomedlarge for others. The World Economic Situation and Prospects 2012released by the UN notes the growth slowdown of the world economy,high unemployment and risk of another round of recession.

Discontents and Protests: The nancial and economic crises wereculminations of a long drawn process. The Europe continent was seethingwith popular movements across the nations one after another since early

2000. It witnessed long and strong strike actions by the working classagainst pension reforms in France, Germany, Italy and England during2004-06. The French workers went on continuous strikes which couldonly be compared with actions of British workers during 1984-85. In thesubsequent years, strike actions by the workers spread to Belgium, Norway, Ireland, Greece and Spain.

In Greece two big confederations belonging to the private and publicsector jointly organized seven one-day general strikes in 2010. Portugal

also experienced two huge strike actions in 2010 by 3 million workers. InSpain the confederations organized massive strike on September 29,2010. Railway and Transport workers in Italy observed total strike. TheUnited States gave birth to a global movement namely 'Occupy WallStreet' that immediately spread to Europe and other countries with the




rousing slogan "they are just one percent, we are ninetynine". It originatedagainst the bank-bailouts, corporate-plunders and unchecked power of theWall Street and turned into a broad anti-capitalist, anti-exploitationmovement.

The whole of US and Europe have been witnesses to sporadic andvigorous strikes and movements of workers against wage cuts,retrenchment, and unfair practices of various authorities during theseyears. The various governments have taken austerity measures tocompensate against the charity made to banks and corporates out of the public funds. These austerity measures are actually meant for cutting the benets and incomes of the workers. The workers have vigorouslyresented the moves but in most of the places they have faced brutal

repression by the state, which did not hesitate to use repressive stateorgans to break workers' resistance.

The governments of more than half of the European Union's 27member states have fallen or been voted out of ofce. In most cases, adirect line could be drawn between the government's exit and the so-called austerity measures put in place because of the economic situation. In fact, this has manifested the wrath of common people andthe working class against the pro-corporate policies of these ruling

classes and the regimes.

During the period there had been popular uprisings sweeping across theArab world which was undoubtedly a major breakthrough in theotherwise politically impervious region. They were provoked by soaringination, joblessness and tyrannical rule. Within a short span rulers have been forced out from power in Tunisia, Egypt and Yemen. Civil uprisingshad broken out in Bahrain and Syria. Major protests took place in Algeria,Iraq, Jordan, Kuwait, Morocco and Sudan. The revolt and the movement

expressed explicitly the desire of the people for democracy and freedom.

Latin America: Towards a positive alternative: Opposite to theimperialist economic policies pursued by the advanced economies of USand Euro zone most of the Latin American countries have chosen a Leftist path. They have deliberately and consciously rejected the US ledLiberalization and Globalization which promoted open market and privatization. They have rejected the policy prescription given by theIMF-WB-US Treasury Department, also known as the 'WashingtonConsensus' and made a clean break with them. During the last decadeVenezuela, Chile, Brazil, Argentina, Dominican Republic, Uruguay,Bolivia, Honduras, Nicaragua, Ecuador, Paraguay. EI Salvador andPeru have chosen pro-people and democratic governments. Bolivia




has nationalized its oil and gas reserves. Ecuador and Venezuela haveannulled their energy contracts with international oil-cartels. Thelatter has also nationalized its banks. We hopefully look forward to theonward march of Latin American people which might lead the

international working class movement to a positive direction.It is surprising that the Governments which have been in power in ourcountry from 1991 to till date have not learned any lesson from theInternational Financial Crises. Governments led by Congress underUPA as well as led by BJP under NDA have followed almost similareconomic policies especially in the Banking sector. Whereas theCongress led Government started the policy of liberalisation andprivatisation, BJP led Government introduced a separate ministry

for disinvestment of public sector. Now, let us have a look at theconsequences of Banking Sector reforms.

ELEMENTS OF BANKING SECTOR REFORMS

Neoliberal banking reform seeks to undermine these structural changesand the concomitant role of the banking sector. There are a number of policies that are geared towards this end. To start with, controls on interestrates or rates of return charged or earned by banks have been diluted ordone away with. In practice, this never means that the range of interestrates is completely "market determined". The central bank inuences oradministers that rate structure through adjustments of the bank or discountrate at which it lends to the banking system and through its own openmarket operations. The government also inuences interest rates byaltering administered interest rates offered on small savings and pension/provident fund depositors.

While liberalization does not, therefore, fully "free" interest rates, it hasother kinds of consequences. It encourages competition betweensimilarly placed nancial rms aimed' at attracting depositors on the onehand and enticing potential borrowers to take on debt on the other.Competition in these spheres not only takes non-price forms, but leads to price competition that squeezes spreads and forces rms to depend onvolumes to shore up their bottom line. That is, within the range implicitlyset by the central bank (and at times the government). Banks areencouraged by liberalization of rates to accept lower spreads in the hopeof neutralising the effects on prots by attracting larger volumes of business.'

The economy anarchy of capitalist society as it exists today is, in my opinion, the real sourceof the evil… Private Capital tends to be concentrated in few hands …(resulting in) anoligarchy of private capital, the enormous power of which cannot be dffectively checkedeven by a democratically organised political society. – Albert Einstein




Second, there have been policy changes aimed at increasing the creditcreating capacity of banks and reducing the extent of pre-emptionthrough reductions in the Cash Reserve and Statutory LiquidityRatios, while offering them greater leeway in using the resulting

liquidity by altering priority sector lending targets. Third, banking reform has sought to increase competition through

structural changes in the nancial sector. It has permitted a substantialdegree of "broadbanding" of nancial services, with developmentnance institutions being allowed to set up mutual funds andcommercial banks, and banks themselves permitted to diversify theiractivity into a host of related areas. The broad trend is towards a formof universal banking, manifested in the reverse merger or merger of

development nance institutions with banks. The Reserve Bank ofIndia's Mid-Term Review of the Monetary and Credit Policy for 1999-2000 declared: 'Though the DFls would continue to have a special rolein the Indian nancial System, until the debt market demonstratessubstantial improvements in terms of liquidity and depth, any OFI,which wishes to do so, should have the option to transform into a bank(which it can exercise), provided the prudential norms as applicable to banks are fully satised."

Fourth, liberalisation removes or dilutes controls on the entry of new private banks subject to their meeting pre-specied norms with regardto capital investments. This aspect of liberalisation inevitably appliesto both domestic and foreign nancial rms, and caps on equity thatcan be held by foreign investors in domestic nancial rms aregradually raised and done away with. Easier conditions of entry do notautomatically increase competition in the-conventional sense, sinceliberalisation also involves freedom to acquire nancial rms for

domestic and foreign players and extends to permissions provided toforeign institutional investors, pension funds and hedge funds toinvest in equity and debt markets. This often triggers a process ofconsolidation.

Further, the existing nationalised banks, including the State Bank of India,were permitted to sell equity to the private sector and private investorswere permitted to enter the banking area. This applied to foreign banks aswell. These banks were given greater access to the domestic market, both

as subsidiaries and branches, subject to the maintenance of a minimumassigned capital and being subject to the same rule as domestic banks.

The RBI has raised the cap on FDI in private sector banks from 20 to 49and then to 74 per cent while retaining the cap at 20 per cent in the case of




the public sector banks. The foreign ceiling on FDI applies to all forms ofacquisition of shares (IPOs or initial public offers, private placementsADRS/GDRs and acquisition from existing shareholders). Foreign branches having brand presence in India can also undertake direct

investments in private and public sector banks subject to approval fromthe Reserve Bank of India (RBI). This provides the basis for an expansionof the reach of existing foreign banks through equity-enabled tie-ups withIndian entities. With the mushrooming of private banks promoted byIndians in recent years and the more recent trend towards mergers of theseentities with larger strategic partners, the new policy sets the stage for anexpansion of foreign bank presence in India.

Fifth, to render the rivalry generated by this liberalisation of conditions

of entry and expansion effective in inuencing bank functioning, banks have been provided with greater freedom in determining theirasset portfolios. Liberalisation involves a reduction in controls overthe investments that can be undertaken by nancial agents. Financialagents are permitted to invest in areas they were not permitted to enterearlier. Most regulated nancial systems sought to keep separate thedifferent segments of the nancial sector such as banking, merchant banking the mutual fund business and insurance. Agents in one

segment were not permitted to invest in another for fear of conicts ofinterest that could affect business practices adversely. There was alsothe danger that savings parked in deposits and protected with depositinsurance could be misused for speculative investments. Financialliberalization involves the breaking down of the regulatory wallsseparating these sectors, leading in the nal analysis to the emergenceof the so-called "universal banks" or nancial supermarkets. Bankswere permitted to cross the rewall that separated the banking sector

from the stock market and invest in equities, provide advance againstequity offered as collateral and proffer guarantees to the brokingcommunity. Consequent ability of nancial agents to straddlemultiple nancial activities implies that the linkages between differentnancial markets tend to increase, increasing fragility and allowingdevelopments in anyone market to affect others to a far greater degreethan they did before. Today Banks are focusing on Cross sellinginstead of their core business that is collecting deposits & lending it.

Finally, since nancial deregulation often results in practices that increasevolatility and may de-stabilize the nancial system, the governmentspecied new capital adequacy norms for the banks, prescribed guidelinesfor accounting and for provisioning for bad debts and planned for theexpansion of the capital assets of banks. The norms prescribed by the




Basel based International Banking principles should not be applied toPublic Sector Banks in India which are under the control of the Govt andRBI.

Effects of Banking Sector Reforms

The Banking Sector reforms have reversed the purpose of nationalisation promoting privatisation, reducing credit to the poor and marginalised,focus has shifted to class banking with major chunk of credits going to thelarge borrowers and agriculture getting only a pittance. This has alsoresulted in huge non performing assets and we are in the verge of anancial crises. If US had collateralised debts through toxic assets, wehave started transferring bad loans to asset reconstruction companies. IfUS allowed mortgaging the same assets more than once, we areconverting bad assets through corporate debt restructuring into to performing assets. The collapse seems to be inevitable unless thegovernment changes its policies and RBI comes out with viable solutions.

The great Bank Robbery Non Performing Assets

Bank robbery always makes big news. But, not when it is craftilyconducted by clever corporates. Corporate robbery of banks evencarries a fashionable nametag, 'non-performing asset'. It refers to

loans that have gone sour and are not recoverable. Banks simply writethem off. Unlike other categories of bank robbers who, if caught, face prosecution under a host of sections and sub-sections of the Indian PenalCode, big-time corporate bank robbers mostly go scot-free, althoughseveral of them are even known to be habitual loan defaulters. (Think ofVijay Mallaya who can buy a cricketer for Rs.13 cr and run formula I racecars but will not repay loans to banks)

Banks, mostly in the public sector, have restructured or written off loans

worth over Rs. 3 lakh crore to favour large loan defaulters in less than thelast two years of the UPA regime. The scale and depth of the recent loanwrite-offs and debt restructuring by banks have embarrassed even theunion nance minister, the Reserve Bank and Parliamentary standingcommittee on nance. Thanks to judicial protection received by thoselarge corporate loan defaulters, stakeholders don't even get to know thenames of the concerned corporate promoters and their guarantors.

The rise of PSU bank NPAs, led by the State Bank of India, has been

phenomenal since the last nancial year, assuming almost scandalous

Thanks to judicial protection received by those large corporate loan defaulters,stakeholders don't even learn the names of the concerned corporate promoters andtheir guarantors




proportions, seemingly vying with such mega scams as 2G and 'Coalgate'in terms of amounts involved and the number of high-prole businesshouses blowing up bank funds. According to CRISIL, a top rating agency, banks' gross NPAs this scal may grow by Rs.1 trillion to Rs. 4 trillion in

March 2014. The amount is really big if compared with RBI's estimate ofgross bank NPAs since 2001 at Rs. 6 trillion. Data collected by RBI overthe last one year blew the lid off what goes as banks' loan classication.

Gross NPAs of PSU banks have risen from Rs. 71,080 crore as of March,2011, to Rs. 1.55 lakh crore by the end of December 2012. The gross bank NPAs was 3.3 per cent in March, 2013. It rose to 3.7 per cent by the end ofJune. Crisil predicted it could grow to 4.4 per cent by March 2014, turningalmost Rs. 1 trillion worth bank credit as NPAs within such a short span.

Bulk of the NPAs was on account of only some 30 top loan defaulters,stated by the Union Finance Minister P Chidambaram himself.Admittedly, a key reason behind the sudden spurt in bank NPAs is theeconomic slowdown. But, it would be naïve to believe that banks andlarge corporate borrowers did not notice the early warning. The personalassets of the Corporate businessmen keep increasing only.

Yet, what is the government doing about it? Who are those 30 top loandefaulters? What are their business proles? How could they access such

large sums of large bank funds, despite the risk factors linked with their businesses in view of the current economic slowdown and their past loanrepayment records? And, who were their guarantors? These are some ofthe questions long bugging stakeholders, including depositors andordinary shareholders. They would like to have some convincing answersfrom those big NPA-hit banks or the government. Government banks are bleeding. Taxpayers' money is being doled out to recapitalise these publicsector banks. The depositors and general public are in the dark. Even the

Parliamentary standing committee on nance had expressed concern overthe phenomenal rise in PSU banks' NPAs in less than 18 months.

Notably, the impression one gets from recent statements-to-strictures byFinance Minister P Chidambaram, the former nancial services secretary,Rajiv Takru, and the former RBI deputy governor K C Chakrabarty on thealarming rise of PSU banks' NPAs caused mainly by some three dozenlarge loan defaulters is that they are helpless about the way the publicfunds are openly stolen or taken away by some smart corporate cookies.

Takru wants banks to 'act tough with willful defaulters.' Why are those banks not paying heed to the top nance ministry bureaucrat? Could it be

Vijay Mallya's Kingfisher owes Rs.2,673 crore is the largest defaulter of PSBs (except SBIs) whileWinsome Diamond and Jewellery Co with dues of Rs.2,660 crore is the second biggest defaulter.




because of some high-level political interference? Who are they? It iscommon knowledge that several of the top loan defaulters are builders andreal estate developers, all boasting top political connections in Delhi.

The former RBI deputy governor Chakrabarty's frustration over the

massive increase in bank NPAs is even more telling. At a recent bankers'meet, he spoke about how banks sacriced over Rs. 1,00,000 crore bywriting off 'bad loans' to corporates which, he said, was much higher thanFinance Minister Chidambaram's farm loan waiver in 2008 before theLok Sabha polls that invited strong criticism by big industries and theirapex bodies. What is preventing Chakrabarty, himself a former chairmanof Punjab National Bank, from wielding his stick against the truant PSU bank managements as a deputy governor of the country's central bank?

Why aren't the government and RBI naming the defaulters and attachingall their assets along with their credit guarantors'?

Bad loans are being recast like never before to save large corporatedefaulters and banks themselves from public criticism in the name ofcorporate debt restructuring (CDR), mostly with retrospective effect,ignoring its impracticability and risk factors in many cases. CDR is oftenmisused to temporarily window-dress balance sheets by both banks andloan defaulters.

According to a FICCI report, banks have cumulatively recast loans to thetune of Rs 2.5 trillion under the CDR exercise, mostly during the last fewmonths. Last year, banks had restructured loans worth Rs. 75,000crore, almost double the 2011-12 gure. Bankers privately fear that agood chunk could turn unproductive. The CDR provides relief tocompanies which are unable to repay existing loans by extending the payback period, reducing or partly waiving the interest rate, giving arepayment holiday and the option to convert a part of loan into equity.

During last April-June alone, PSU banks had restructured loans of someone dozen companies for a total amount of Rs. 20,000 crore.

How many of the PSU banks do proper diligence before sanctioning creditand how fewer of them approve CDR on merit? By the RBI deputygovernor's own admission, a majority of the write-offs involve bigaccounts, underscoring the need to hold top executives who clear the bigloan proposals, accountable for its decisions. “Wrong appraisal is leadingto diversions, leading to over- leverage, leading to fraud, leading to NPAs…they are all inter-related,” he said. Large bank NPAs in the lasttwo years, the huge loan write-offs and the sudden spate of CDRs beforethe Lok Sabha election are far worse than occasional bank robbery. Theyrob depositors and shareholders of better returns and thegovernment of tax revenue to shield large corporates who have been




traditionally running away with bank funds, turning companies sickand throwing workers out of jobs, all seemingly with the consent andconnivance of bank managements.

Kingsher Airlines is biggest defaulter of public sector banks.

According to the All India Bank Employees Association, Kingsher topsthe list of 50 biggest defaulters of PSBs that owes Rs40,528 crore. In orderto highlight the increasing bad loans or non-performing assets (NPAs)menace in PSBs, the bank employees are observed 5th December 2013 as'All India Demands Day' by wearing badges and holding rallies.

According to AIBEA, Mumbai-based Winsome Diamond and JewelleryCompany (erstwhile Su-Raj Diamond India Ltd), with dues of Rs2,660crore, is the second highest defaulter, followed by Electrotherm India Ltdat Rs2,211 crore.

In May 2013, ratings agency CRISIL downgraded the Jatin R Mehta-ledWinsome Diamond to a 'D' rating while placing it under watch in view ofcontinuous defaults of the company's overseas customers and consequentdevelopment of letters of credit (LoCs). At that time, Punjab NationalBank, the lead bank of the consortium, had an exposure of more thanRs1,800 crore to the Winsome Group.

Some of the other big-ticket defaulters include, Zoom Developers Pvt Ltd(Rs1,810 crore), Sterling Biotech Ltd (Rs1,732 crore), S Kumars Nationwide Ltd (Rs1,692 crore), Surya Vinayak Industries Ltd (Rs1,446crore), Corporate Ispat Alloys Ltd (Rs1,360 crore), Forever PreciousJewellery and Diamonds (Rs1,254 crore), Sterling Oil Resources Ltd(Rs1,197 crore) and Varun Industries Ltd (Rs.1,129 crore)




Rupees in crores)

1. Kingsher Airlines 2673

2. Winsome Diamond & Jewellery Co. Ltd. 2660

3. Electrotherm India Limited 2211

4. Zoom Developers Private Limited 1810

5. Sterling Bio Tech Limited 1732

6. S. Kumars Nationwide Limited 16927. Surya Vinayak Industries Ltd. 1446

8. Corporate Ispat Alloys Limited 1360

9. Forever Precious Jewellery & Diamonds 1254

10. Sterling Oil Resources Ltd. 1197

11. Varun Industries Limited 1129

12. Orchid Chemicals & Pharmaceutical Ltd. 938

13. Kemrock Industries & Exports Ltd. 929

14. Murli Industries & Exports Limited 884

15. National Agricultural Co-Operative 862

16. STCL Limited 860

17. Surya Pharma Pvt. Ltd. 726

18. Zylog Systems (India) Limited 715

19. Pixion Media Pvt. Limited 712

20. Deccan Chronicle Holdings Limited 700

21. K.S. Oil Resources Ltd. 678

22. ICSA (India) Ltd. 646

23. Indian Technomac Co. Ltd. 629

24. Century Communication Limited 624

25. Moser Baer India Ltd. & Group Companies 581

BORROWERSLOAN NOT

REPAID




26. PSL Limited 577

27. ICSA India Limited 545

28. Lanco Hoskote Highway Limited 533

29. Housing Development & Infra Ltd. 526

30. Mbs Jewellers Pvt. Ltd. 524

31. European Projects And Aviation Ltd. 510

32. Leo Meridian Infra Projects 48833. Pearl Studios Pvt. Ltd. 483

34. Educomp Infrastructure & School Man 477

35. Jain Infraprojects Limited 472

36. Kmp Expressway Limited 461

37. Pradip Overseas Limited 437

38. Rajat Pharma/ Rajat Group 434

39. Bengal India Global Infrastructure Ltd. 428

40. Sterling Sez & Infrastructure Pvt. Ltd. 408

41. Shah Alloyes Ltd. 408

42. Shiv Vani Oil And Gas Exploration Limited 406

43. Andhra Pradesh Rajiv Swagruha Corp. Ltd. 385

44. Progressive Constructions Ltd 351

45. Delhi Airport Met Ex Ltd. 346

46. Gwalior Jhansi Expressway Limited 346

47. Alps Industries Limited 338

48. Sterling Port Limited 334

49. Abhijeet Ferrotech Limited 333

50. Sujana Universal Industries 330

40,528

BORROWERSLOAN NOT

REPAID




In view of the rising bad loans in state-owned banks, the AIBEA said thegovernment should set up a special investigation team to probe thedecisions of their credit appraisal committees in cases where borrowershave turned wilful defaulters.

In addition, the bank employees associations also want responsibilityxed on banks' top brass for the loans that have turned bad, allow banks toshare information on NPAs and wilful defaulters under the Right toInformation (RTI) Act, and declare wilful loan default as a criminaloffence.

According to the Union, over the past seven years, there are fresh badloans worth Rs4.95 lakh crore only in PSBs, while during the same period,

these lenders wrote off bad debts worth Rs1.4 lakh crore. Top fourdefaulters of state-run banks constitute Rs23,000 crore of NPAs.

“There are 7295 names in which about Rs 68,000 crore loans areinvolved Rs 1 crore and above. That has to be published. Incentives are being given for corporate delinquents. In fact, about 3.25 lakh crore ofwhich about Rs 2.70 lakh crore of bad loans are being restructured as goodloans, as performing loans. These are all pertaining to the corporate

people. Restructured loans / CDR accounts are nothing but hidden NPAs.It's a volcano. Anytime the bomb can blast."

The Unions have demanded PSBs to publish list of bank loan defaulters ofRs1 crore and above, make wilful default in bank loan a criminal offence,order investigation to probe nexus and collusion (between the borrowerand ofcials), amend Recovery Law to speed up the process, takestringent measures for recovering bad debts and not to incentivisecorporate delinquency.

Associations are now demanding that banks publish the list of defaultersof Rs 1 crore and above and classify “wilful default” as criminal offenders.Currently, RBI collates the data of wilful defaulters for improving banksupervision. Finance Ministry and RBI have been concerned about theway promoters renege on their loan repayments. They had asked banks togo after wilful defaulters aggressively and even look at managementtakeover as part of the recovery process. But nothing has happened.




At the outset, it may be mentioned that the Survey results of 26th round(1971-72), 37th round (1981-82), 48th round (1991-92) and 59th round(2002-03) of AIDIS are comparable across Agency-wise and State-wiseover the period. In order to compare the progress of formal and informal

nance after the bank nationalization and to provide an overview of theow of credit to rural areas in terms of credit agency-wise, we haveanalyzed these Survey results in a comparative manner and State-wiseseparately. It is important to note that there are problems in using datafrom these surveys given the sharp reduction in sample size of householdsand villages, especially in the 37th round in 1981-82. It may further bementioned that, the estimates of household debt starting from 48th roundin 1991-92 are based on both cash and kind, whereas before that it was

based on cash debt. From Table 1, it can be assessed that theinformal/non-institutional nance was gradually declining during the1960s, was very nearly broken during the 1970s, with the institutionalagencies making steady inroads into the rural scene. The share ofinstitutional credit agencies in the outstanding cash dues of the ruralhouseholds at the all-India level increased from 29 per cent in 1971 to 61 per cent in 1981 and then the pace of increase was arrested rising to 64 percent in 1991. During the following decade, the share declined by about 7

percentage points and reached 57 per cent in 2002. It seems that creditcooperatives, commercial banks, and other formal nancial sector programs in rural areas have not displaced informal sources of credit,altogether. The 2002 AIDIS survey revealed that 43 per cent of ruralhouseholds continue to rely on informal nance, which includes professional moneylenders, agricultural moneylenders, traders, relativesand friends, and others.

Institutional agencies (All-India Level)

It can be observed that, the most remarkable performance was that of thecommercial banks while the share of co-operative societies in theoutstanding cash dues of cultivator households increased from 20.1 percent in 1971 to 28.6 per cent in 1981, thereafter dropping to 27.3 per centin 2002, that of commercial banks rose to 29 per cent in 1991, after risingsharply to 28 per cent in 1981 from a meager 2 per cent in 1971. It appearsthat the large number of branches that was set up by various commercial banks in 1970s and the subsequent introduction of rural banking schemes

have driven the commercial banks to assume the role of principal creditagency in rural areas. It may be of interest to note that the share ofgovernment departments in the outstanding cash dues of cultivatorhouseholds, after showing a decline from 7 per cent in 1971 to 4 per cent in1981, again rose to 6 per cent in 1991 and dropped to 2 per cent in 2002. As




a whole, at the all India level, among the institutional credit agencies, theco-operative societies and the commercial banks were the two mostimportant agencies in the rural sector. These two agencies together, shared91 per cent of the entire amount of debt advanced by the institutional

agencies, accounted for 52 per cent of the outstanding cash debt, with co-operative societies (27.3 per cent) accounting for a greater share than theCommercial Banks (24.5 per cent) in 2002.

The gradual increase in the share of formal institutional credit inagriculture witnessed some reversal during 1991-2002 mainly because ofa pull back by commercial banks. This disquieting trend is, in part, due to acontraction in rural branch network in the 1990s, and in part due to thegeneral rigidities in procedures and systems of institutional sources of

credit (Subbarao, 2012).Non- Institutional agencies (All-India Level)

The combined share of all the non-institutional credit agencies in theoutstanding cash dues of cultivator households recorded a sharp decline of32 percentage points during 1970s but the decline got arrested in the1980s – the fall being just of about 3 percentage points but increased to 43 per cent subsequently. The decline is found to be the steepest for the creditagency 'agricultural money lenders', whose share came down to 6 per cent

in 1991 from about 9 per cent in 1981 and 23 per cent in 1971. However,the share of 'professional money lenders' has reported a rise to about 9 percent in 1991, after registering a fall to 8 per cent in 1981 from about 14 percent in 1971. Subsequently, the share has jumped to about 20 per cent in2002. Relatives and friends appear to be gradually losing their importanceas a source of credit. From 14 per cent in 1971, their share fell to 9 per centin 1981, and dipped further down to about 7 per cent subsequently. As awhole, among the non-institutional agencies, professional money lenders

were the main source of credit. Among thenon-institutional creditagencies, money lenders – both professional and agricultural – in thatorder were found to be important sources of nance in rural areas, theirrespective shares being 19.6 per cent and 10.0 per cent. The share ofrelatives and friends was 7 per cent of the cash dues of rural households.

State-level Changes during 1971 to 2002

The State-level estimate indicates that of the total outstanding cash dues,the share of institutional agencies had increased marginally during the

1980s in most of the states, after having increased substantially during the1970s (Table 2). However, the role of the institutional agencies, as judgedfrom their share in the outstanding cash dues, varied from state to state. Asnapshot of this variation in 2002 shows that in the rural areas,institutional credit agencies accounted for 85 per cent in Maharashtra,




followed by Kerala (81 per cent), Himachal Pradesh and Orissa (74 percent each) and Jammu & Kashmir (73 per cent). In contrast, not even 50 per cent of the debt was contracted through the institutional creditagencies in the rural areas of Andhra Pradesh (27 per cent), Rajasthan (34

per cent), Bihar (37 per cent) and Tamil Nadu (47 per cent).

Andhra Pradesh 14 41 34 27 86 59 66 73

Assam 35 31 66 58 65 69 34 42

Bihar 11 47 73 37 89 53 27 63

Gujarat 47 70 75 67 53 30 25 33

Haryana 26 76 73 50 74 24 27 50

Himachal Pradesh 24 75 62 74 76 25 38 26

Jammu & Kashmir 20 44 76 73 80 56 24 27

Karnataka 30 78 78 67 70 22 22 33

Kerala 44 79 92 81 56 21 8 19

Madhya Pradesh 32 66 73 59 68 34 27 41

Maharashtra 67 86 82 85 33 14 18 15

Orissa 30 81 80 74 70 19 20 26

Punjab 36 74 79 56 64 26 21 44

Rajasthan 9 41 40 34 91 59 60 66

Tamil Nadu 22 44 58 47 78 56 42 53

Uttar Pradesh 23 55 69 56 77 45 31 44

West Bengal 31 66 82 68 69 34 18 32

All India 29 61 64 57 71 39 36 43

Source:All India Debt and Investment Survey, NSS 59th Round, Report No. 501.

Table 2: Share of Institutional and Non-Institutional Agencies in

Outstanding Cash Debt of Major States in Rural Areas

(Per cent)

1971 1981 1991 2002 1971 1981 1991 2002 (26th) (37th) (48th) (59th) (26th) (37th) (48th) (59th)

Non-InstitutionalMajor States

Institutional




During the periods 1971 to 2002, the states do not reveal any uniform pattern in the share of institutional agencies in total debt. Compared to1991, the picture had changed in some of the major states (Table 2). Of the20 major states in the rural, as many as 15 have shown a fall in the share of

institutional agencies, notable among them are Bihar, Punjab, Haryanaand West Bengal, where the fall in percentage share from 1991 values had been to the tune of 36, 23, 23 and 14 percentage points, respectively. Onthe other hand, 13 major states out of 21 had registered a rise in the share,which, barring a few with marginal to moderate rise, can be described assharp to spectacular.

Recent Reports on 'Informal Credit Related Issues'

In the absence of survey data beyond AIDIS 2002 (published in December2005), we have heavily drawn upon three recent Reports (RBI, 2006;GOI, 2010; RBI, 2011) that were also based on the sample surveys andextended the AIDIS data. The Report of the Task Force on 'Credit RelatedIssues of Farmers' (Chairman: Shri U. C. Sarangi), submitted to theMinistry of Agriculture, Government of India, looked into the issue of alarge number of farmers who had taken loans from private moneylenders, but not covered under the 'Agricultural Debt Waiver and Debt ReliefScheme' of 2008. The Task Force Report has observed that “…more

disquieting feature of the trend was the increase in the share ofmoneylenders in the total debt of cultivators. There was an inverserelationship between land-size and the share of debt from informal sources. Moreover, a considerable proportion of the debt from informal sources was incurred at a fairly high rate of interest ”. About 36 per cent ofthe debt of farmers from informal sources had interest ranging from 20 to25 per cent. Another 38 per cent of loans had been borrowed at an evenhigher rate of 30 per cent and above, indicating the excessive interest

burden of such debt on small and marginal farmers. The continueddependence of small and marginal farmers on informal sources of creditsuch as private moneylenders was attributed to constraint in the rural banking network and services arising out of nancial sector reforms.Rigid procedures and systems of formal sources preventing easy access by small and marginal farmers, vied with the easy and more exiblemethods of lending adopted by informal sources. The Task Forcemembers came across situations where farmers were borrowing at the rate

of ve to ten per cent per month.The identication of farmers indebted to private moneylenders is difcult.Such loans in most cases have no formal records and identifying andauthenticating the debt from moneylenders may lead to problems of moralhazard (GOI, 2010). According to the Report, credit needs of small and




marginal farmers are not only growing but are getting diversied due toincreasing commercialization and modernization of agriculture.Simultaneously, for a variety of other needs, farmers incur considerableexpenditure, resulting in increased borrowings. Adequacy, timeliness,

affordability and convenience are factors that inuence farmers, and forthat matter, all borrowers, in their choice of creditors. Given that a singlesource may not to be able to satisfy all their credit needs, many farmersapproach both formal and informal sources. Invariably, those who cannotafford any collateral are forced to borrow from informal sources. The TaskForce reviewed the debt swap schemes of banks and revealed that theseschemes had limited success as farmers were reluctant to disclose thename of the money-lenders, apprehensive in disclosing debt and some had

even repaid the existing debt out of their Kisan Credit Card limits. Eventhough the Task Force came across some good debt swap schemes, bankers reported difculty in taking these to scale and also reported thatthere was little guarantee that farmers would not ever again borrow frommoneylenders.

Based on a review of the existing laws on money lending in the country,the 'Technical Group to Review Legislation on Money Lending' (RBI,2006) has observed: “…in spite of there being a legislation, a large

number of moneylenders continue to operate without license, and even theregistered moneylenders charge interest rates much higher than permitted by the legislation, apart from not complying with other provisions of the legislation. Signs of effective enforcement are absent ”.The Report recommended legislative reforms to streamline the activitiesof moneylenders through suitable mechanism of incentives anddisincentives. In this regard, Jeromi (2007) attempted to analyse theworking of moneylenders in Kerala based on a sample survey, and

mentioned that the existing legal provisions and regulatory andsupervisory mechanisms are inadequate to protect the interests of bothdepositors and creditors in rural Kerala. The growing commercialisationof Indian agriculture has encouraged the rise of trader-moneylender, asthe formal sector nance is inadequate to meet the growing creditrequirements of agriculture. The Task Force (GOI, 2010) noted that themoneylender today comes in many forms – as an outright lender, as asupplier of inputs/consumer goods, as a for-prot non-banking nance

companies (NBFCs) including the for-prot MFIs, as a buyer of produce,and as an owner of the land on which the farmer is dependent. The sheernumbers of moneylenders, easy access to them, and their intricaterelationships with the borrowers coupled with limited access to formalinstitutions made it difcult for borrowers to complain against them.




MICROFINANCE

India, which has a rich tradition of cooperative spanning over a century,has embarked upon a path of giving lot of llip and incentives to privatemicro-nance institutions which have of late been mushrooming

throughout the length and breadth of the country. This has been done at the dictates of World Bank which has found a wonderfulvehicle to purvey micro-nance, and thereby to channel nance capital tothe rural areas, fast replacing cooperatives and the principles, and ethos behind them. Though initially, the experiment for micro-nance began with a lot of positive note with NABARD drawing the rstexperimental SHG- Bank linkage programme in 1992, the sector, sincethe beginning of full-blown neo-liberal economy in early 2000, has been

fast replacing the SHG-Bank linkage programme with private MFI-Banklinkage programme. This dominance by private sector nancial sharkshas totally vitiated the culture of micro-nance with exorbitant interestrates breaking the back of poor farmers, especially women, who, in manystates like Andhra Pradesh, Tamil Nadu, Orissa, Maharashtra, WestBengal, and Karnataka are forced to commit suicides unableto bear the burden of loan and interest. The data furnished by NABARDfor the period 2006- 07 to 2009-10 show that there was a huge rise in both

annual disbursements of bank credit and total outstanding against MFIduring this period. For example, the total loans disbursed

-to MFls from Banks showed an increase from Rs. 1153 crore in 2006 07 toRs. 8063 crore in 2009-10, thereby registering a growth rate of 71 %,90%and 116% in the years 2007-08, 2008-09 and 2009-10 respectively overthe previous years. However, the Bank loans disbursed to SHGs showedan increase from Rs. 7981 crore in 2006-07 to Rs. 14453 crore in 2009-10,registering an increase of 11 %, 38% and 18% in 2007-08, 2008-09 and

2009- 10 respectively over the previous years. In several states like WestBengal, Maharashtra the share of MFls in total bank credit disbursed behind micro-nance has overtaken that of SHGs. In 2010, in WestBengal, such share of MFls has become 54.41 % against 45.59% in case ofSHGs, whereas in Maharashtra, such share of MFls became 63% against36.6% for SHGs. At the All India plane, MFls had 42% of such share of bank credit behind micro-nance against 57% for SHGs in 2010. (Ref."Financing of Indian Micronance", Tara S Nair, EPW, June

23,2012).Though, there were immense possibilities to harness the potential ofSHG-Bank linkage programme through the intermediation ofcooperatives as being attempted during the regime of previous Left FrontGovernment in West Bengal and Kerala's highly successful




"Kudumbashree" model of micro nance which effectively integrates thegrass-root planning process, decentralization of democracy, procurementof food crop from farmers through SHGs, running of successful PDSthereby contributing to food security, such model of peoples' cooperation

was anathema to votaries of global nance capital. NABARD shouldreorient its focus to SHG-Bank Linkage programme especially in the backward regions of our country.

Micronance sector in India has progressed remarkably since 1990s andthis sector has been acting as an important ally in expanding financialinclusion in rural areas (NABARD, 2012). Reserve Bank providesguidelines to banks for mainstreaming micro-credit providers,inter alia,stipulated that micro-credit extended by banks to individual borrowers

directly or through any intermediary would be reckoned as part of their priority sector lending. However, no particular model was prescribed formicro-nance and banks have been extended freedom to formulate theirown models or choose any conduit/intermediary for extending micro-credit. Though, there are different models for micronance provision, theself-help-group (SHG)-Bank Linkage Programme has emerged as themajor micronance program in the country. It is being implemented bycommercial banks, regional rural banks (RRBs) and cooperative banks.

The gathering momentum in the micronance sector has brought intofocus the issue of regulating the sector.

The Malegam Committee Report (RBI, 2011) was constituted to studyissues and concerns in the MFI sector in the wake of Andhra Pradeshmicro nance crisis in 2010. The Committee, inter alia, recommended (i)creation of a separate category of NBFC-MFIs; (ii) a margin cap and aninterest rate cap on individual loans; (iii) transparency in interest charges;(iv) lending by not more than two MFIs to individual borrowers; (v)

creation of one or more credit information bureaus; (vi) establishment of a proper system of grievance redressal procedure by MFIs; (vii) creation ofone or more “social capital funds”; and (viii) continuation ofcategorisation of bank loans to MFIs, complying with the regulation laiddown for NBFC-MFIs, under the priority sector. The recommendations ofthe Committee were discussed with all stakeholders, including theGovernment of India, select State Governments, major NBFCs workingas MFIs, industry associations of MFIs working in the country, other

smaller MFIs, and major banks. The Reserve Bank has accepted the broadframework of regulations recommended by the Committee Report.

The Micro Finance Institutions (Development and Regulation) Bill, 2012envisages that the Reserve Bank would be the overall regulator of the MFIsector, regardless of legal structure. The Reserve Bank has provided the




views on the Bill to the Government of India. The aims of the Bill are toregulate the sector in the customers' interest and to avoid a multitude ofmicronance legislation in different states. The proper balancing of theresources at the Reserve Bank to supervise these additional sets of

institutions besides the existing regulated institutions could be animportant issue. Requiring all MFIs to register is a critical and necessarystep towards effective regulation. The proposal for appointment of anOmbudsman will boost the banking industry's own efforts to handlegrievances better. Compulsory registration of the MFIs would bring theerstwhile money-lenders into the fold of organised nancial services inthe hinterland who had been acting as MFIs hitherto. The Bill requireswider discussion and the Standing Committee has prevented it from

presented in the Parliament.As reported in Malegam Committee Report, the impact of micronanceon the lives of the poor is inconclusive. The micro surveys create fears thatin some cases micronance has created credit dependency and cyclicaldebt. The analysts expressed doubt as to whether lending agencies have inall cases remained committed to the goal of ghting poverty or whetherthey are solely motivated by nancial gain. This augurs well for theregulation of micronance as a tool of nancial inclusion and greater well

being of the society.Informal credit has certainly declined as a percentage of total debt, and both professional and agricultural moneylenders have reduced their shareover time. Informal/non-institutional nance was gradually decliningduring the 1960s and was nearly broken during the 1970s with theinstitutional agencies venturing into the rural areas with Nationalizationof major commercial banks and setting up of Regional Rural Banks withinitiatives of the Reserve Bank. The decline in the share of moneylenders

reects in part the Government's efforts to register and regulate professional moneylenders.

At the all India level, among the institutional credit agencies, the co-operative societies and the commercial banks were the two mostimportant agencies in the rural sector. These two agencies together shared91 per cent of the entire amount of debt advanced by the institutionalagencies, accounted for 52 per cent of the outstanding cash debt, with co-operative societies (27.3 per cent) accounting for a greater share than the

Banks (24.5 per cent). Of the 20 major states in 2002, as many as 15 haveshown a fall in the share of institutional agencies, notable among them areBihar, Punjab, Haryana and West Bengal. The above facts indicate that thecooperatives, commercial banks, and other formal nancial sector programs in rural areas have not displaced informal sources of credit




altogether as 43 per cent of rural households continue to rely on informalnance in 2002.

The most important reason for continuation of informal rural creditmarket is that the existing nancial institutions tend to restrict their

lending activities to more risky eld of lending to the agricultural sector.Those in the rural credit market prefer to use informal sources of creditdespite the fact that the interest rates are much higher. Informal sources donot insist on punctual repayment as banks or cooperative societies do.Usually, it is possible to obtain loans for such purposes as marriage. Thereare generally no intricate and complicated rules governing the granting ofloans by the village moneylenders. And informal sources are willing tolend money more freely without collateral and on the borrower's mere

promise to repay.The Credit Deposit Ratio in the North Eastern Region came down to29.8% in 2004 from 54.9% in 1990. In the Southern Region it came downto 68.1% in 2004 from 82.1% in 1990. Lending to priority sector was18.2% in 1969 which increased to 45.3% in 1987 but has reduced to25.8% in 2004.

Agricultural credit which was 10.7% in 1975 incrased to 17.7% in 1987 but has come down to 10.8% in 2005.

Agriculture Loans of Rs.25000 and less was 49.1% in 1985 came down to23% in 2005.

In 1980-81, 51.7% of agriculture loans went to Marginal farmers (upto 2.5Acres) but in 2001-02 it has come down to 38.4%.

As per RBI Reports, as on 2010 top 100 centres contribute 69.4% ofDeposits and 78% of credit.

The credit deposit Ratio is 84.9% for Metros, 58.8% for ubran, 51.8% for

semiurban and 59% for Rural.Regional Rural Banks:

Regional Rural Banks have registered substantial progress in terms of,deposit mobilization, credit extension and prot earnings. The 64 RRBshaving a branch network of 17,856 could mobilize a deposit of Rs.2,11,458 crores as on 31 st March 2013 and recorded a net prot of Rs. 2385crores during the same period. More notably the credit-deposit ratio,which was 57.1 % in 2009-10, increased to 59.69% in 2010-11,62% in2011-12 and reached 66.13% by the end of March 2013. The presence ofRRBs in the context of nancial inclusion is indispensable. Theemployees and ofcers of the Banks have been demanding since long forthe establishment of National Rural Bank of India as the Apex Body or




merger of these Banks with Sponsor Banks. However, this has not beenacceded to by the Government of India. Instead, the Government hascome out with a proposal of privatization of RRBs by virtue of the RRBAct Amendment Bill 2013. Should the amendments be carried out, it

would certainly dilute the existing share holding pattern (presently,Central Government 50%, Sponsor Bank 35% and State Government15%) and open up avenues for Private and Corporate Sector as well as NGOs to intrude into the ownership of RRBs in the garb of expanding itscapital base. In that case RRBs' role mission of rural development will beseverely distorted.

NABARD:

Considering its overreaching inuence on the development of economyfor more than three decades, NABARD is today widely recognized as aunique Development Financial Institution (DFI) in the country. Butconsequent upon the restructuring of the nancial sector within thecurrent policy frame work, NABARD has also been targeted. During the period the entire RBI holding in NABARD, nearly 73% of the total has been off loaded to the Government of India. Only 1 % remains with RBI.Most likely the Government will sell out its holding in the market and pave the way for its privatization. Earlier Government put NABARD

under Income Tax net and NABARD Bonds ceased to be treated as priority sector bonds from 1st April 2007. These measures were directedto weaken the capital base of this Bank and make it totally dependent onmarket borrowing for mobilization of resources and thus pave the way for privatization. In the process country's agriculture and rural economy will be hit hard.

NBFCs:

The unchecked breeding of the NBFCs throughout the length and breadthof the country has reached an alarming proportion causing concern foreverybody. The Saradha episode in West Bengal in recent times hasrevealed the illegal modus operandi of these companies. The companieshave built up a wide range of clientele, collected huge money from the public by giving them false promises of high return. In view of themushrooming of NBFCs, Sri Sachin Pilot, Central Cabinet Minister incharge of the Ministry of Corporate Affairs wrote a letter in March 2013 tothe Finance Minister, Shri P. Chidambaram (The Hindu dt. 18.03.13)stating his apprehensions - "2,200 rms not registered as NBFCscommitting nancial frauds ..... at present there are 34,754 suchcompanies (NBFCs) out of whom only 12,375 have been permitted by theRBI to function as NBFCs under the RBI Act. It is the remaining 22,000 or




so companies which mainly account for instances of cheating and fraud"of common people in different parts of the country. Sri Pilot stronglydesired that RBI as the regulator of NBFCs should immediately interveneand "penalize companies that are not registered with them as NBFCs" but

engaged in various fraudulent activities and urged the Finance Minister toforthwith issue such instructions to RBI. RBI must not escape itsresponsibility under the coverage of mere technicalities. The 22,000 or socompanies unregistered with RBI seem to be nobody's responsibility.Even though they are registered under the Companies Act, the Ministry ofCompanies Affairs cannot control them, neither the latter have theexpertise nor wherewithal to detect sophisticated nancial fraudsindulged in by such companies. The State Governments, which should

curb their activities, are found either wanting or reluctant or casual, whilemainly large number of poor people is robbed by them. It is also found thata few of such unscrupulous entities, after defrauding people, simplydisappear for some time, and reappear in another name and form aftersome time to resume their "y by night" operations. There is urgent needto check them.

Financial Sector Legislative Reform Commission (FSLRC) Report:A Death Knell for RBI

Financial Sector Legislative Reform Commission (FSLRC) was set up byGovernment of India in March 2011 with a mandate to evolve the newregulatory architecture for the nancial sector as a whole. TheCommission headed by Justice B. N. Srikrishna has submitted its

ndrecommendations to the Finance Minister, Government of India on 22March 2013. The recommendations have some dangerous implicationsfor RBI, taking away many of its functions and vastly diluting itsauthority. Let us see some of the recommendations:

Public Debt should be taken away from the RBI without any pre-conditions on scal consolidation.

Non-Banking Financial Companies should be outside the purview ofRBI.

RBI should be stripped of its role in nancial markets.

RBI will have nothing to do with Forex Market.

Capital Controls should be rested with the Ministry of Finance.

The designation of Governor should be abolished and head of RBIshould be named as "Chairperson".

Banking Regulation and Supervision and the Payment & SettlementSystem may be left with RBI but only for a temporary period.




A statutory Monetary Policy Committee to be set up to take executivedecisions on monetary policy. There would be only 2 RBI membersand 5 External members appointed by the Government - each memberhaving a vote. Chairperson can give veto to the decision only by

explaining with a public statement.It will be worthwhile to quote from a write-up by Sri S. S. Tarapore,former Deputy Governor of Reserve Bank published in the Business Lineon May 3, 2013: "The Commission's Report reeks of an anti-ReserveBank of India (RBI) bias. The FSLRC game plan is to vivisect the RBIInstitutions which are not His Master's Voice should rst be destroyed,which would enable the setting up of an obedient edice " He cautionedultimately - "one must remember that countries that destroy their Central

Banks destroy themselves". The unions of banking industry havestrongly denounced the recommendations of the Committee. All therecommendations are directed to strip RBI of most important functionswhich it is performing today. This is unfortunate because over the yearsRBI has accumulated its skills in supervision of different segments ofnancial sector. The status and shape of today's nancial sector owes agreat deal to RBI.

CO OPERATIVES

In the context of global nancial crisis and misplaced emphasis onushering in private sector investments in all spheres including in retailsector, a renewed emphasis on development of cooperative sector is theneed of the hour. Unfortunately, when the cooperatives combine the mostessential ingredients of group dynamics, democratic and collectivefunctioning ably dovetailed with group entrepreneurship and functioningto internalize the market signals, the present central govt has probablystarted to ignore the importance of this very useful sector. This has not

escaped the attention of even the Central Govt appointed High PowerCommittee on Cooperative, 2009, when they observed " In terms of thedecent work paradigm .... cooperatives could lead the way bydemonstrating what we really mean by freedom, equity, security andhuman dignity ..... Thus cooperatives by being true to their basic principles provide locally-based answers to globalization cooperativesare vital agencies to face the Challenges posed by globalization F ro mthe Ninth Plan onwards, cooperatives have found no mentionin the Five

"I do hope Finance Minister, Chidambaram will one day say, 'I am often frustratedby the Reserve Bank, so frustrated that I want to go for a walk, even if I have towalk alone. But thank God, the Reserve Bank exists'." - Dr. D. Subba Rao, FormerRBI Governor




Year Plans drawn up by the Planning Commission. It is important that duerecognition is given to cooperatives as a third sector of the economy andits development, particularly in terms of its marginalized and weaker segments .... "

Interestingly, when India, despite having a very rich legacy of cooperativeculture and ethos, started to neglect the sector. Various countries of theworld have started to use this sector as an effective buffer against theonslaught of global nance capital. For example, in Brazil, when thewater supply and water resource management was targeted for privatization, cooperatives proved to be a great success to thwart privatization apart from ushering in efciency in water distribution.Similar examples are galore from countries like Italy, France, etc. Before

the setting in of global nancial crisis, Italy which has no less than 4.13million cooperative organizations, responded more effectively to thechanging global economic challenges by depending on small and mediumsized rms in cooperative sector. Similarly, in France today there are morethan 1.13 million cooperative organizations covering more than 90%French farmers. In China too, a renewed emphasis is being given tocooperative farming practices. This new form is based on the householdcontract responsibility system (which was the hall mark of Chinese

market reforms in the country side) and encourages farmers to converttheir contracted land resources into stocks and become shareholders in thenewly formed cooperative rms. It is also necessary here that thecollective nature of resources be made clear, so that transfer, sale ormortgage of land resource share are forbidden. According to some leadingChinese academics (Enfu Cheng, Xiaoqin Ding in " Building China's NewCountryside: Multiple Modes of Collective and Cooperative Economy" available in www.ras.org.in). in pushing towards this new cooperative

mode with land resources held as shares, one should fully consider theconditions required for the conversion as well as willingness of thefarmers. Interestingly, several areas of China has already adopted this newform of collectivization of agriculture through cooperative mode like theSonjiang area of Shaghai, where some 200,000 mu of farmland are brought under this new form of cooperative farming. China has rightlyemphasized that the second leap of rural reform and development needsthe wide development of cooperative economy. At present the National

People's Congress is reported to be drafting and revising relevant laws oncooperative economy. In China today, cooperatives are envisaged ashorizontal cooperation between farmers themselves and verticalcooperation between farmers' organizations and companies as well ascooperative farms of mixed economic modes.




Globally the importance of cooperatives is wide AS noted in UNdocuments like that in International Fund for Agriculture Development(IFAD).lt informs us that ranging from small- scale to multi-milliondollar businesses across the globe. cooperatives operate in all sectors of

the economy. count over 800 million members and provide 100 million jobs worldwide - 20% more than multinational enterprises. In 2008. thelargest 300 cooperatives in the world had an aggregate turnover of $1. 1trillion. comparable to the gross GDP of many large countries. In Brazil,cooperatives were responsible for 37.2% of agricultural GDP and 5.45%of overall GDP in 2009 and earned about US $3.6 billion from exports. InMauritius, cooperatives account for more than 60% of national production in the food crop sector and in Kenya the savings and credit

cooperatives have assets worth US $2.7 billion, which account for 31 % ofgross national savings. (Ref. www. ifad.org /media/ press/ 2011176.htm ).

In such a background, NABARD's mandate to develop cooperativesshould be strengthened and broadened with adequate resources.Governments should provide adequate support for the co-operatives.

VISION FOR FUTURE AND OUR DEMANDS

BLUEPRINT FOR AN ALTERNATIVE BANKING POLICY

Indian banking is currently in the midst of a transition driven by a changein the nancial and banking policy regime of the government. The regimechange is motivated by a shift in perspective in which banking, which wasfor long considered an instrumentality for rapid and more broad- basedand equitable development is now seen as a business aiming to make prots partly from mobilising household saving and redirecting it into protable investments and partly with generating fee-based incomesthrough matching demands for resources with supplies of credit orinvestment. The autonomy of RBI is curbed. Finance Ministry interfereswith all PSU Banks.

It bears emphasising that these changes are part of the overall change inthe economic policy regime involving external and internal deregulationand liberalisation and neo-liberal scal and monetary reform. However,there is reason to believe that the impact that the new regime has had on banking has been among the principal mechanisms through which theadverse effects of that regime on the poor have been transmitted.

Our analysis of both the conceptual errors underlying the liberalisationstrategy and the dangers involved in adopting it in the banking sector,suggest that what is necessary is an alternative banking policy tied in thenal analysis to an alternative strategy of development. While the longterm objective of such an alternative would be to raise the rate of growth




and make it more broad-based, equitable and inclusive, the immediateconcern should be to restore social banking as one of the means to dealwith the agrarian crisis and acute agrarian distress facing the country andthe farming community.

In what follows we are concerned with selected aspects of that alternative- with the institutional framework of banking, with the restoration of a rolefor development banking and with credit delivery to agriculture, smallindustry and small borrower. Such a policy, if it is to be appropriate forIndian conditions must, inter alia, include the elements delineated in whatfollows.

OWNERSHIP ISSUES – Public Sector to Lead

Implicit in the Indian development banking model is the public ownershipof a major share of banking assets. This must continue. From the 1990s,denationalisation of the banking sector has resulted from thedisinvestment of equity shares of PSBs domestically and from the entry ofnew private Indian and foreign banks as a result of the freeing of theconditions of entry. Both of these, especially the entry of new private banks, have redened the functioning of the PSBs.

Further restructuring through liberalization has been suggested in the

recent ofcial pronouncements relating to foreign direct investment in banking and mergers of PSBs. The international experience and theaccumulated Indian evidence of the past 23 years show the futility and thedangers inherent in pursuing this neo-liberal strategy of bankrestructuring. The following recommendations - presented as negativeassertions - emerge from a careful review of the empirical evidence anddene the minimum safeguards necessary to protect Indian banking from powerful trans-national and private (national) investor interests.

International experience suggests that raising the FDI cap, permitting FIIinvestments in domestic banks and linking voting rights of private shareholders to their equity stake do not serve the objective of raising the rate ofeconomic and industrial growth. Rather, it enhances the vulnerability ofthe nancial system, by encouraging risky investments, increasingexposure to global capital and putting pressure on the government toliberalise exchange rates and capital ows

Hence, following the July 2004 RBI guidelines, no single entity or group

of related entities should be allowed to hold shares or exercise control,directly or indirectly, in any private sector bank in excess of 10 percent ofits paid-up capital. This is in the interest of diversied ownership as wasrecognised by the RBI in its July 2004 guidelines. Hence the omission ofthis clause in the roadmap for foreign bank presence released by the RBI




on 28th Feb.2005, which limits itself to specifying the condition on one-mode presence, needs correction." But the Government has gone aheadincreasing the share holding of individuals to 26% in Private Banks. It isunfortunate that Axis Bank which was in the Public Sector (UTI) has been

privatized.Similarly, the amendments made in the Banking Regulation Act should bereversed. The essential problem in seeking a greater role of FDI in thedomestic banking sector springs from the attendant loss of autonomy andcontrol on domestic policymaking and outcomes. The evidence frommany emerging market economies, particularly Latin America, showsthat a greater reliance on banking FDI has given rise to conditions of: (a)stalled overall growth in credit with domestic banks also reducing loan

exposure; (b) far greater nancial instability during episodes of shock tothe domestic economy, and (c) uncertainty and slow economic growth dueto foreign banks acting as conduits for transmission of contagion andstrategic decisions from parent banks on to developing markets. It is to benoted that these consequences are but an expression of the loss ofeconomic sovereignty. We can choose to ignore these lessons only at ourown peril.

CONSOLIDATION – What Kind?

The argument that the threat to domestic banking arising from an increasein the foreign banking presence should be dealt with throughconsolidation of domestic banks, which would also serve to strengthenthem and make them global players is without logical or empirical basis.While the gains from consolidation are expected along greater economiesof scale and scope available to bigger banks, the evidence doesn't supportan automatic association between large size and protability. On the otherhand, bigger banks tend to rely much more on arm's length transactions

and standardised balance sheets and loan accounts, on fee-based incomesthat seek to avert credit and interest risk, and on trading risks in thesecurities market. These tendencies give rise to the phenomenon ofnancial exclusion (whereby a large segment of the population remainsunbanked), result in lower credit provision and engender nancialfragility via a greater exposure to nancial markets. To advocate bankmergers as a general policy move and not as a carefully thought-outmeasure to consolidate the gains of two banks, would be to lend

legitimacy to the above outcomes.Consolidation also amplies the nancial fragility resulting fromliberalization in the form of increased exposure of banks to the 'sensitive'sectors - commodities, real estate and the capital markets, where




speculation is rife and returns volatile. Private banks have increased theirexposure to the stock market through acquisition of shares, advancesagainst shares and guarantees to brokers. Once the domestic nancialsector is liberalized and then linked to external capital ows through

capital account convertibility, the probability of banking crisis, currencycrisis and nancial crisis increases manifold.

Dealing with these problems requires not merely restraining and evenreversing the change in banking policy regime, but a restoration of animportant role for an accountable central bank as a regulatory authority.The shift in regime is accompanied by a combination of regulatoryforbearance and an emphasis on improved accounting practices, betterdisclosure and new' capital adequacy norms. While these do not always

deliver on their regulatory objectives, the capital adequacy norms oftenresult in a contraction of bank lending.

Further, to restrict and reduce the fragility of the nancial system it isnecessary to: (i) rebuild the Chinese Walls separating the banks and thestock market and drop proposals such as permitting banks to trade incommodities exchanges; and (ii) strongly regulate the access of domestic banks to global resources, which would also help improve monetarymanagement. It is becoming clear that SEBI cannot play the role in

preventing misuse of bank funds in the stock market, necessitating jointsupervision by SEBI and RBI.

REVIVAL OF DEVELOPMENT BANKING

An important component of an alternative policy is a revival ofdevelopment banking. However, a renewed stress on the erstwhile role ofdevelopment nance institutions (DFIs) would only be possible once the

segmented nancial market structure, wherein the DFIs service long-termloans and in return have access to concessionary nance from the CentralBank or the Government. Development nance institutions have been anintegral part of the credit delivery system in India with a very substantialcontribution to domestic capital formation in agriculture andmanufacturing industries. In the 1990s with the corporatization,transformation into universal banks and subsequent privatization of theDFIs, these institutions have lost their unique development perspective.

Even while the gap created by the transformation of institutions like theIDBI and ICICI into universal banks needs to be lled, immediately thefurther decline of development banking should be halted through therestructuring of institutions like the IFCI and the strengthening of the statenancial institutions and the SIDBI, for example.




PROMOTING SOCIAL BANKING

The most urgent and immediate need is to increase credit provision to therural areas for both agricultural and non-agricultural activities. If theows of bank credit to agriculture, small-scale industries and other

informal sectors have to be rapidly expanded, some comprehensive andenduring strategy for credit delivery has to be put in place and the loss ofmomentum spawned by the neglect of developmental goals by banks nowfor over a decade has to be regained.

First and foremost is the need for further spreading of branch network by scheduled commercial banks and RRBs. A palpable cause fordecline of bank lending to agriculture, to small-scale industries and tosmall borrowers, has been the banks' professional reluctance towardsexpanding their branch network in rural areas: The number of bank branches operating in rural areas (classied uniformly on the basis ofthe 1991 Census) has experienced an absolute reduction from 33,017(or 51.7 per cent of the total) in March 1995 to 32,283 (47.4 per cent ofthe total) in March 2003 and to 32,095 (47.4 percent of the total) inJune 2005. Given the option, the scheduled commercial banks wouldnot like to operate in rural areas. This has been proved clearly since ,March 1995 after the disbanding of branch licensing policy and the

granting of freedom to bank boards to decide on their branchexpansion programme. Since then, there has been a reduction ofroughly 840 rural branches instead of an addition of at least 8,000 bank branches in rural areas under the erstwhile policy thrust. This approachhas thus spawned a serious institutional vacuum in the rural creditstructure, which needs to be rectied.

Second, it is necessary to adopt a multi-agency form for the ruralnetwork with well-dened roles for commercial banks, cooperative

banks, the regional rural banks and wherever feasible, micro-nanceinstitutions. The last of these, however, cannot be seen as a substitutefor a formal banking presence. The Business Correspondent operatedCustomer Service Points and Ultra Small Branches should beconverted into small Bank Branches.

Third, with vast modern input requirements and diversication intohorticultural products and other allied areas underway, agriculturewould require a more sophisticated system of credit delivery, forwhich induction of a sizeable number of qualied agricultural sciencegraduates and graduates with other relevant technical qualicationswould be necessary. Considering this felt need, the renewed policythrust becomes an excellent opportunity for the government to




generate an additional employment of about one lakh posts essentiallyto rural and semi-urban branches of banks; Considering the pastneglect and the enormous business potential, it would not be tooambitious a goal to induct another lakh of technically qualied ofcers

in the next five years or so. Fourth, it is necessary to move away from the current trend of moving

from the demand for bank-level protability to unit- and eventransaction-level protability, as this forecloses cross- subsidisation asa means of sustaining social banking. It is bank-level protability thatmust be emphasised, and even this must be supported with an effort bythe state to carry some of the risk provisions and costs of social banking in its budget.

Fifth, it is necessary to reinforce close coordination between district planning authorities, Panchayati Raj institutions and the banksoperating in rural areas. The system of district-level coordinationcommittees of bankers has apparently become inactive; it needs to bereinvigorated with clear guidelines on respecting the bankers'commercial judgments even as they fulll their sectoral targets. Non-agricultural activity being developed as part of a local level planshould be supported with bank lending, as happened with town and

village enterprises in China, to facilitate faster and more employmentintensive growth in the rural sector.

Sixth, rather than using Self-Help Groups as banking agents, in a newversion of agency banking, what is required is to link SHGs to bankcredit and encourage banks to provide expertise for marketing,accounting etc. Banks have to take a pro-active role in promoting productive activity through the SHGs.

Seventh, there is need to set up an appropriate monitoring system forsocial banking and introduce a system of rewards and penalties forsocial banking performance, particularly in regard to the prioritysector lending targets across bank types. Despite the increasingnumber of heads and higher investment ceilings that are now eligibleas priority sector advances, some private and foreign banks routinelyfall short of the investment target, which underscores the need tostrengthen regulatory oversight. While this needs to be corrected, theincessant dilution of the denition of priority sector advances thatundermines the scheme needs to be reversed. A reappraisal of thedenition of priority sector must also set individual oors for strategicsectors such as direct agricultural advances, loans to small-scaleindustries within the overall priority sector credit target since these




sectors obviously lie at the lower end of the pecking order ofinvestment preferences of banks. Finally, given the declining ratio ofcredit to deposit especially in the rural areas and backward states the present practice of expressing priority sector credit as a share of total

credit underestimates the extent of rural disintermediation. A moreappropriate practice would be to use deposits in the denominator of theratio.

Finally, it is necessary to set up a mandatory system of reporting to theParliament and state legislatures of performance and progress on thesocial banking front. A comprehensive, periodic report on policies, practices and statistics relating to social banking should provide the basisfor informed public debate.

ROLE FOR FISCAL AND MONETARY POLICY

There is reason to believe that the erosion of scal policy space and thegrowing emphasis on the independence of the central bank have notmerely reduced the availability of resources for development banking, butremoved any need to support banks undertaking unusual risks in lendingto disadvantaged sectors and populations. Monetary policy and scal policy should be so designed as to make available resources fordevelopment and social banking and guarantee the risk implicit inactivitie substantial social returns and benets.s with

These are some of central elements of an alternative banking regimewhich the government must immediately adopt and implement.

ROLE OF RBI

Reserve Bank should be given autonomy from the Finance Ministry andallowed to operate with its own wisdom which saved the Indian BankingSystem from the US & European Financial crises. It is Regulatory system

of RBI and the powerful struggles of Bank employees under the banner ofUnited Forum of Bank Unions which saved our Banks from the Financialcrises.

ROLE OF NABARD

NABARD should be given more funds and autonomy to expand its reachto the rural areas and develop agriculture and allied activities. NABARDalso should be made the regulator of SHGs. With guidelines given byRBI.

STRENGTHENING CO-OPERATIVE SECTOR

The Government should strengthen Co-operative sector which is cateringto the weaker section, agriculturists and artisans instead of trying tostrangulate the co operatives.




STOP OUTSOURCING

Regular works are being outsourced. The labour is exploited with lowsalary. Business Correspondents and Business Facilitators are paid poorsalary. There are many cases of frauds committed by outsourced person.

PUBLIC SECTOR BANKS – STRENGTHEN THEM

Public Sector Banks have contributed a lot to the growth of the economywith focus on development banking and social Banking. They have to bestrengthened and move to privatise them should be stopped.

DECENT WAGE RISE TO THE EMPLOYEES

Bank employees today are getting lesser salary than Governmentemployees, private sector and even lesser than under qualied workers. It

is imperative that they are provided with a decent wage taking intoaccount their contribution to the development of the economy.

PARITY ON SALARY WITH CENTRAL GOVERNMENTEMPLOYEES :

Salary Revision for Central Government employees will be effected based on Pay Commission recommendations once in ten years and their present salary is as per Sixth Pay Commission recommendations. Before1979, bank ofcer's salary used to be higher than the Group “A” ofcer of

Central Government. To have a parity with Government employees,Pillai Committee was constituted in 1979 and as per the Committee'srecommendations the pay scales of bank ofcers were rationalised andmade at par and aligned with Pay Scales of Government Ofcers. Such parity was distorted to the disadvantage of bank ofcers by

th th thimplementing 4 , 5 and 6 Pay Commission Recommendations at muchhigher levels and the salary difference at all levels is alarmingly high. Toquote, the bank ofcers' gross pay slip amount at initial stage is about

Rs.30700/- as against Rs.56400/- for Government ofcers. Similardifferences exist at different stages in the hierarchy. It has caused seriousimpact on the quality of recruits in a highly sensitive sector like bankingwhich involves dealing with public money.

t hMany State governments have adopted 6 Pay Commissionrecommendations and many Public Sector Undertakings have alsoadopted them as bench mark for salary revision which has created a hugeap between the bankmen on one hand and government employees and

PSU employees on the other.

“If doctors are paid the same salary as bus drivers, community would not be crazy aboutmaking their children doctors” Nouman Ali Khan




The comparative scales since 1979 are as under:-

Basic Pay Basic Pay

Group-A Ofcers of

Govt. of India

Scale-I Ofcer in

a Bank

Prior to 1979 Rs.450/- Rs.500/-

In 1979 Rs.700/- Rs.700/-

In 1986 Rs.2,200/- Rs.2,100/-th

(4 pay commission from 1987) Rs.8,000/- Rs.7,100/-

In 1996 Rs.12,500/- Rs.10,000/-th

(5 pay commission from 1997)In 2006 Rs.15,600/- + GP Rs.14,500/-

th(6 pay commission) Rs.5,400/- Total Rs.21,000/-

th7 Pay Commission projected Rs.63000/- ?

Year

Public Sector Banks operate in a disciplined manner by observingcompliance of regulatory requirements and in fact it was because ofthis that the Indian banks have emerged relatively unharmed fromthe recent global nancial crisis.

The ten lac ofcer and workmen employees of banking sector haveactively involved in nation building by effectively implementingnational agenda of employment creation and economic & Industrial growth and enjoy lot of respect and popularity particularly in Rural & Semi Urban areas.

The work force of Public Sector Banks are responsible for increase :1. In the Business Mix of the Public Sector Banks from Rs.53,71,959

Crore during the year 2008-2009 to Rs.102,18,471 Crore during theyear 2012-2013.

2. in Operating profit from Rs.45,495 Crore during 2008-2009 toRs.1,21,917 Crore during 2012-2013.

3. in Net Prot from Rs.34,382 Crore during 2008-2009 to Rs.50,583Crore during 2012-2013.

4. in Total Income (interest and other income) from Rs.3,15,554 crore during 2008-2009 to Rs.6,11,658 Crore during 2012-2013.

5. in the Net Prot for the year 2012-2013 to Rs.50,583 Crore after providing for NPA Rs.46,021 Crore due to huge slippages during the




year 2012-13 of Rs.1,19,613 Crore. Addition to NPA has affected thenet Prot in two ways. It has not generated income and the provisionhas further drained the income.

Thus it is imperative that bank ofcers and workmen are adequatelycompensated due to their growing responsibility, transferability andaccountability in order to maintain high standards of honesty andintegrity, as their job demands, in the highly competitive and sensitivesector of the Indian economy, particularly in view of the following facts:

1. That bank ofcers who were getting more than government ofcialsearlier, were brought at par with Government ofcers onimplementation of Pillai Committee report in, 1979, are now getting

approximately Rs. 20 thousand less than government ofcials at rststage of the pay.th

2. It is pertinent to mention here that 7 pay commission has beenconstituted for revision in salaries of Central Government employees,whereas Bank employees have yet to catch the salaries they are

thgetting as per 6 pay commission report.

3. There is steep rise in the CPI ination and the salaries in absoluteterms have also been eroded. Consumer price index has already

increased by 1501 numbers over 4440 which was prevailing on01/11/2012 i.e. the level at which IBA has agreed to merge the DAwith basic pay.

4. The productivity per employee, the business per employee and branchand protability of the public sector banks have enhanced many folds.

5. There is a danger of pouching of the existing young and trained staffof the Public Sector Banks by the new generation Private SectorBanks and Foreign Banks which will emerge as per new Banking

Policy.

6. The unhappiness of the highly qualied youth who have joined thePublic Sector Banks is seen widely in facebook.

7. As the Bank Ofcers and employees contribute a lot for thedevelopment of the economy and have to take business risks they haveto be adequately compensated.

FIVE DAY WEEK

Majority of the foreign countries follow ve day week. RBI follows veday week. Central Govt also follows ve day week. The Software

Paying your employees well is not only the right thing to do but it makes for good business .– Jim Sinegal, CEO, Costco




industry and many of the multi national corporations follow ve dayweek. In an environment where 62% of the transactions are done throughalternate channels, introducing ve day week will reduce expenditure,save energy and also provide adequate rest and recuperation for the

employees. (Annexure: Note on 5 day week)The Political Parties, Elected Representatives and Policy Makers have totake into account the experiences of the past and present and prepare a newroad map for the Development of the country with focus on equity,equality and social justice as enshrined in the constitution. BankingSector can turn around the country and our Beloved Nation can become amodel for the globe.




Note On Five Day A Week

& Regulated Working Hours

The demand for 5 day a week in the Banking Sector is based on scientic practices with regard to the health of the employees, productivity andenvironmental concerns. We put forward the following which explainsand justies the need.

The ILO has passed many conventions on this issue, some of which arereproduced below:

Article 19

C047 - Forty-Hour Week Convention, 1935 (No. 47)Convention concerning the Reduction of Hours of Work to Forty a Week(Entry into force: 23 Jun 1957)Adoption: Geneva, 19th ILC session (22Jun 1935) - Status: Instrument with interim status (TechnicalConvention).

Preamble

The General Conference of the International Labour Organisation,Having met at Geneva in its Nineteenth Session on 4 June 1935,

Considering that the question of the reduction of hours of work is the sixthitem on the agenda of the Session; Considering that unemployment has become so widespread and long continued that there are at the presenttime many millions of workers throughout the world suffering hardshipand privation for which they are not themselves responsible and fromwhich they are justly entitled to be relieved; Considering that it isdesirable that workers should as far as practicable be enabled to share inthe benets of the rapid technical progress which is a characteristic of

modern industry; and Considering that in pursuance of the Resolutionsadopted by the Eighteenth and Nineteenth Sessions of the InternationalLabour Conference it is necessary that a continuous effort should be madeto reduce hours of work in all forms of employment to such extent as is possible; adopts this twenty-second day of June of the year one thousandnine hundred and thirty-ve the following Convention, which may becited as the Forty-Hour Week Convention, 1935:

Article

Each Member of the International Labour Organisation which ratifiesthis Convention declares its approval of--

(a) the principle of a forty-hour week applied in such a manner that the standard of living is not reduced in consequence; and

D. Thomas Franco Rajendra Dev




(b) the taking or facilitating of such measures as may be judgedappropriate to secure this end;

and undertakes to apply this principle to classes of employment inaccordance with the detailed provision to be prescribed by such separate

Conventions as are ratified by that Member.

Article 8

How is work during the weekend regulated?

I LO Weekly Rest Conventions No. 14 (1921) and No. 106 (1957) requirethat each worker have at least 24 hours of uninterrupted rest every sevendays. Whenever possible, the rest day(s) should be simultaneous for allemployees of an undertaking and correspond with the traditions and

customs of the country. As noted above, Arab countries often choose the Friday, instead of the Sunday, as the rest day for the week. In China and Hungary, two days off are laid down in national laws. In European Union(EU) member States, the EU Working Time Directive (93/104) entitlesworkers to a minimum of 24 hours of rest per week, principally on Sunday,in addition to 11 hours of rest each working day (between shifts). In mostcountries, although only one day off per week is prescribed in nationallegislation, collective agreements or commonly accepted norms set the

standard of a five-day week.Following are the benets of a 5 day work week:

1. Reduced fuel costs. Employees would have to endure the dreadedcommute one day less each week, thereby saving money at the pumpwith reduced fuel consumption.

2. Decreased absenteeism. On a six-day schedule, employees areforced to cram their one day off with personal errands, chores, games,and social outings. By the time Monday comes around, there hasn't

been a minute of rest and employees are tired. So they call out ofwork. This wouldn't happen so frequently if employees have a secondday to accomplish the work they have to do outside of ofce.

3. Increased productivity. It's a well-established principle of productivity that workers become less efcient where no deadlinelooms. That's why we're more efcient in the week beforevacation—we know, we have to get it done by the time we leave. Thesame idea is transferable to a shortened workweek. Employees are

least productive on Saturdays so why not just eliminate themaltogether?

4. Improved job satisfaction and morale. Satisfaction with what goeson in the workplace may be tied to what goes on outside the




workplace. Employees who spend more time with family and friends,who have the exibility of two days off, will return to work refreshed.

5. Reduced personnel turnover. Happier employees tend to leave lessoften. If they like the job, they're more likely to stick around.

6. Reduced energy costs. By closing for two, instead of one day eachweek, Banks stand to reduce substantial energy costs. These costs can be signicant.

7. Improved work-life balance. As a result of the added day,employees who work a ve-day week will have more time to spendwith their families and friends.

8. Reduced trafc congestion. This potential effect may be seen

largely on Saturdays, which is the day most employers are convertingto a non-working day.

The First Company to give 5 day week:

It was Heny Ford who introduced the 5 day, 8 hours per day, work weekfor the rst time in 1926. Ford was tired of continuously losing goodemployees, he was trying to increase employee retention and at the sametime increase prots, so he basically doubled wages and implemented a 5-

day work week, and in the process effectively invented the modernweekend. It is Henry Ford who is widely credited with contributing to thecreation of a middle class in the United States.

His reasons had nothing to do with charity, and everything to do withincreasing prots and dealing with the forces of competition. It is also proved that every reduction of the length of the work week has beenaccompanied by an increase in real per-capita income.

The New Economics Foundation has recommended moving to a 21 hourstandard work week to address problems with unemployment, highcarbon emissions, low well-being, entrenched inequalities, overworking,family care, and the general lack of free time. The Center for Economicand Policy Research states that reducing the length of the work weekwould slow climate change and have other environmental benets.

Around the world

Chile, China, Colombia, European Union, Austria,Bulgaria, Czech

Republic, Denmark, Estonia, Finland, France, Hungary, Ireland, Ireland,Italy, Latvia, Poland, Portugal, Romania, Spain, Sweden, UnitedKingdom, Pakistan, Tunisia, Japan, Mexico, Mongolia, Newzealand,Russia, USA etc. work ve days a week from Monday to Friday.




Islamic countries:

Saudi Arabia has a Thursday- Friday weekend and Oman, Algeria,Bahrain, Bangladesh, Egypt, Iraq, Jordan, Kuwait, Libya, Malaysia,Kelantan, Terengganu, Kedah, Mauritania, Qatar, Sudan, Syria , United

Arab Emirates, Lebanon, Israel etc have a Friday- Saturday week end.

In our country:

In the light of the revolutionary changes that have taken place as regardsthe technology initiative, such as tele-banking, Internet banking, core banking, any time banking and anywhere banking and also the bankingexpansion through a large ATM net work, there is a strong case forimmediate consideration of demand for introduction of a 5 day week.

62% of the Banking Business is done by alternate Channels of Banking as per RBI. This will also reduce global warming to an extent. Further, 5-dayweek will provide good health to bank employees and reduce expenditureon electricity and fuel.

So there is total justication for 5 day week to be introduced in theBanking Industry following the footsteps of RBI which has dened 8hours work, ve day week and exible working hours.




IOB OFFICERS'ASSOCIATION

NOTE OPPOSING COST TO COMPANY

CONCEPT OF CTC - GENERAL :

Cost to Company is the amount that the Company (Employer) spendson their Employees. In other words, the amount the Company spendseither directly or indirectly for employing a person.

For the purpose of clarity, CTC may be dened as “the aggregate sum

which an Employer spends on an Employee and conveyed by way ofoffer letter but the salary disbursed will be much lesser than theoffer”.

CTC – Cost to Company is a deceptive package wherein the Employershows that they are paying a big salary but unfortunately it is otherwise.They overload total expenses of human resources on salary butactually disburse less resulting in - SHOW MORE PAY LESS -concept. The facilities extended by the employer have added to the cost

which means that we pay from salary for getting those facilities whichsome times we may not use / require .

On account of the above , if we calculate the gross pay per month as perthe offer letter it will be much higher than the take home pay theemployee will actually receive as salary on monthly basis.

COMPONENTS OF CTC SALARY :

Different Companies pick up different sets of components to constitutetheir own “CTC” from the following :

OUR IN - HAND SALARY OTHER COMPONENTS

Basic Pay PF Contribution

Dearness Allowance Various allowances reimbursed (which are bank specic)

House Rent Allowance a) Conveyance

City Compensatory Allowance b) News Paper PPA & PQA c) Mobile/Telephone d) Entertainment Expenses e) Medical Expenses f ) L T C

K. Ananthakumar

General Secretary




COST TO COMPANY FOR BANKS :

Government / IBA advocating CTC in the wage revision talks expose theirignorance. CTC includes not only the salary that reaches the hands ofthe employee but also includes many other benets that are statutorylike PF and others like Quarters rent, Medical Insurance, LTC etc. Some companies may even include proportionate rent of ofce cubiclegiven to an employee. While the nature and quantum of benets varyfrom company to company , the benets that are included in CTC alsovary from company to company. It is strange of Government / IBA

talking of CTC when benets vary from bank to bank, like quartersrent, conveyance allowance etc and more so SBI having different paypackage on account of Pension as third benet and also additionalpay and additional DA drawn by SBI employees conventionally / forhistorical reasons. The Pay and Allowances also vary depending on the place of posting.

Hence it is not possible to have a uniform industry-level CTC forbanks.

1) CTC to bank may not have constitutional validity because of thefollowing :

i) CTC will have a xed pay and variable pay where the latter islinked to performance parameters. Since we are not going to

g) Bank specic benetsincidental to employment.

h) Loans given at concessional

rate of interest. i) Canteen Subsidy

j) Superannuation cost –

* Pension

* Gratuity

k) Leave encashment

l) Provision of Car/Driver at

different level m) Bonus/Performance linked

incentive.

n) Variable pay componentwhich constitute 60% of total

pay per month.




have uniform variable pay and it will be against the principleof “ equal pay equal work', a constitutionally guaranteedfundamental right to equality.

ii) Only on this fundamental right to equality, Regional Rural Banks

won a tribunal award for pay parity with sponsor banks. We cannot cause breach of this fundamental right to equality by going tohave differential variable pay.

iii) If there is going to be uniform variable pay, how are we going tohave a uniform industry level performance parameters, whenit is almost impossible to have uniform performanceparameters even within a bank?

iv) Also, Variable pay can not be left to different banks' perception toquantify Vis-à-vis attainment of set goals with different benchmarks in different banks.

2) CTC is conceptually incompatible with industry level wagexation because-

i) CTC is company specic but every bank is having its own setof benets. The benets which are available in each bank aredue to historical reasons and settlements and hence the same

to be continued in the individual banks. ii) CTC is negotiated with individual employee and not a

collective bargain through negotiated settlement.

3) CTC is difcult of implementation in Banks because -

i) variable pay requires measurement of performance which ispossible only in case of quantiable output.

ii) Duties of most functionaries except those of a branch managerwill not have quantiable output.

iii) Performance measurement will be more subjective due to lack ofobjective parameters for most functionaries/employees.

iv) The duties even among managers in all centres are nothomogenous to have a fool-proof objective parameters ofperformance.

v) No level playing eld can be ensured as one branch may have better location, efcient staff and good clientele.

vi) Performance outcomes in banks often depend on uncertainties ofnot only domestic markets but also the global nancial marketswhich are signicantly integrated to Banking Sector in ourcountry.




vii) Banks in Public Sector are not allowed to function on purecommercial considerations as the Government utilizes the banksas vehicles of social upliftment. It is difcult to measure the performance of employees doing mass banking where the

protability is given less importance.4) CTC is inimical to the interest of the bank because-

i) Unlike other industry, Risk management plays a vital part in banking. Banks work on thin spread which can be completelyeaten away if a small portion of its assets become contaminated.

ii) Aggressive banking is anathema to risk management whereas theincentive based variable pay would only be a breeding ground foradventurous banking.

iii) The banking crisis of the USA & Europe was mainly due tothis incentive based pay to their employees / executives.

iv) Everybody's variable pay depends on performance that will bemore subjective in banks. Hence, the subordinates have toplease their superiors who in pursuit of aggressive targets willbend rules with no checks and subordinates will be blind tothe dangers of such aggressive banking.

v) There is often sector-specic political interference in banklending – a la – Civil Aviation in recent times, food credit etc.,which affect the paying capacity of the banks concerned.

vi) CTC in short will compromise every bank's interest across theboard.

CTC is against constitutional validity, conceptually incompatible,strategically inimical to the interest of the bank and difcult forimplementation.

In view of the above, we must wholesale reject Cost to Companyproposed by the Government / IBA .

Pillai Committee established parity of pay between Public Sector BankOfcers and the Group “A” ofcers of the Government of India. V and VIPay Commissions have caused distortions, to the detriment of Bankofcers. We demand restoration of Pay Parity with Group “A” Ofcers ofthe Government of India. The parity should include similar pension withthe provision of up-dation and up-gradation. The Public Sector Banks

being vital instrumentalities of the Government, should be broughtunder the ambit of Central Pay Commission for the purposes of Payand Allowances.




AIBOC's response to RBI's Discussion Paper on

“Structure of Banking in India – The Way Forward”

BACKGROUND:

The monetary policy statement announced by Reserve Bank of Indiard

Governor on 3 May 2013 in Mumbai stated that the guidelines onlicensing of new banks in the Private Sector issued in February 2013indicated that the Reserve Bank would prepare a policy discussion paper

on the banking structure in India within two months keeping in view therecommendations of Committee on Banking Sector Reforms 1998(Chairman: Shri M Narasimham), the Committee on Financial SectorReforms 2008 (Chairman: Shri Raghauram Rajan) and other view points.The discussion paper was expected to cover issues such as consolidationof large-sized banks with a view to having a few global banks, desirabilityand practicability of having small, localized banks as preferred vehicles ofFinancial Inclusion, the need for having investment banks with

differentiated licensing regime for domestic and foreign banks instead ofgranting of universal banking license, policy regarding presence offoreign banks in India, conversion of Urban Cooperative Banks intoCommercial Banks and periodicity of licensing new banks whether on block or on tap.

Reserve Bank of India released the much awaited discussion paper onth

banking structure in India on 27 August 2013. The discussion paperidentied certain building blocks for the reorientation of the banking

structure with a view to addressing various issues such as enhancingcompetition, nancing higher growth, providing specialized services andfurthering Financial Inclusion. The paper also emphasized the need toaddress the concerns arising out of such changes with a view to managingthe trade off for ensuring nancial stability. The envisaged policy will berequired to be in the back drop of strong regulatory and supervisoryregime with increased intensity for supervision for the systemicallyimportant banks. The overall thrust for reorientation is aimed at

imparting dynamism and exibility to the evolving banking structure

1.Contrary to the claim that privatization and free market reduce corruption, evidence showsthat the “black economy” and the propagation of corruption has expanded under suchpolicies, and is now almost 50 per cent of the GDP of the country. (Global Financial Integrity,2010)


J D Sharma, President, IOBOA

Ravi N Shetty, Senior Vice President, IOBOA

P V Mohanan, General Secretary, DBOO



while ensuring that the structure remains resilient and promotes nancialstability. So far so good; we wish that the ultimate objective was as nobleas it is made out to appear!

Before dwelling on the issues covered in the discussion paper, it is

important to have cursory look at the efcacy of regulatory & monetarytools of the Central Bank to check the ination and exchange rates in lastfew months. The untamed inationary pressures have not only playedhavoc on the economy of the country but have also robbed the poor andnot so rich of their purchasing power. The people living on xed incomeare nding it difcult to arrange two square meals a day. Theconsequences of weakening rupee largely caused by the ight of foreigncapital from the country on the rumors of tapering of stimulus package by

the Federal Reserve/American government have been enormous. Theoutow of foreign capital from India had double-edged effect on thecountry. It had created volatility in the currency market by surgingdemand for dollar and weakening local currency on one hand andwidening the current account decit on the other. It is the responsibility ofthe regulator and the government to ensure stability, growth & exibility.We need to create a resilient and robust regulatory framework to ensurethat the economy is protected against the intermittent shocks of

globalization.In the above background, it is recollected that our nancial sector was ableto withstand the shocks of US Financial Crisis 2008, Public Debt Crisis ofUAE, Eurozone Crisis of 2011-12 for the simple reason that the TradeUnions in the banking sector have resisted the unbridled changes on the part of government to hugely integrate various sectors of our economywith the global market, more particularly full Capital AccountConvertibility. This positive role of Trade Unions was acknowledged by

none other than the governor of RBI in 2008-09. There is need tostrengthen the existing banking system and enhance its efciency ofoperations rather than attempting large scale structural changes onexperimental basis. Any failed experiment in banking sector will bedisastrous as India does not have the nancial power of America whichcould afford to provide capital support and other stimulus packages to thefailing banks and other nancial institutions in the aftermath of sub-primemortgage nancial crisis. The managers of Indian economy need to focus

more on upliftment of poor sections of society through effective FinancialInclusion not by merely opening 'No Frills Accounts' and using such

2. The total accumulated capital and assets held by Indians abroad is estimated to be in the

range of half a trillion dollars (Rs. 25 lakh crore) to 1.4 trillion dollars (Rs. 70 lakh crores).




Committee more than two decades ago had not found favour withsuccessive governments at Centre and the Central banking authority. Theexperiment with universal banking has resulted in Asset-Liabilitymismatches and increased NPAs of the commercial banks. Continuous

authorization is as undesirable as the current attempts to increase thenumber of players in given banking space and thus reverting back to the banking era of pre-nationalization days. The move to convert UrbanCooperative Banks to Commercial Banks can be more purposeful if such banks are allowed to be taken over by the Public Sector Banks. Theconsolidation theory for Public Sector Banks is self deceptive since mereconsolidation does not enhance the nancial strength in true sense because the corresponding exposure also increases. The banking

institutions in Public Sector have the potential to perform better if theirBoards are strengthened and allowed independence & freedom to managethe banks in professional manner completely devoid of bureaucratic and political interference in the matters relating to Human Resources andlending operations. This experiment will prove to be safe and soundunlike the move to consolidate through mergers of Public Sector Banks.The government ownership of the banks has been serving its avowedobjectives and there is still a large unnished agenda. The government

should focus on converting the Indian economy to a developed economywhich calls for the active nancial and policy role to be played by thegovernment. Any weakening of either nancial or policy role on the partof government will result into further procrastination of the fulllment ofthe dream of alleviation of poverty from the country. The governmentmust therefore continue to stay invested in the banking institutions of thecountry and there is a strong case to expand the size of Public Sector banking which is the lifeline of Indian economy.

Narasimham Committee recommendations heralded the nancial sectorreforms since the beginning of globalisation of our economy. Many of itsrecommendations were implemented and many were not as there was lackof acceptability of those by the government and the Regulator coupledwith a strong opposition by the Trade Unions in the banking sector. Butwe must realize that the capitalist model of business world-over has beenso powerful that it has almost uprooted the socialist model of businessfrom the world. The determination on the part of the champions of

capitalism has been so strong that it has been continuously nding moreand more friends. The multinational agencies like International MonetaryFund, World Bank, GATT, UN & its Subsidiaries etc., have been acting as

80% of rural and 64% of urban households consume less than the recommended calorie of

food.




character of our banking institutions. The committee of 12 membersincluded K V Kamath from ICICI Bank and Uday Kotak of KotakMahindra Bank to represent the Private Sector Banks with about 22 percent of business/market share whereas the Public Sector Banks having 70

per cent market shares were represented only by one representative viz., OP Bhatt of State Bank of India. At certain places it is stated in the reportthat there was no consensus in the committee but still it is desirable tocarry out the proposals. The report is devoid of any disclosure about theweightage assigned to O P Bhatt who represented Public Sector Bankswhich were largely the targets for nancial sector reforms. Anotherinteresting aspect of the constitution of the committee is the non-inclusionof any representative from RBI, the Regulator. The seriousness of such

omission gets further compounded by the fact that one of the terms ofreference was “to identify changes in regulatory & supervisoryinfrastructure that can better allow the nancial sector to play its rolewhile ensuring that risks are contained”. It is beyond comprehension thatthe Chairman of the committee who has been groomed in atmosphere ofAmerican economy was considered competent to suggest changes in theregulatory & supervisory infrastructure in Indian context without even being assisted by any representative from such Regulator.

Raghuram Rajan who was credited with forecasting the US FinancialCrisis much before it erupted is also conscious of the fact that Sub-primeCrisis in America and high competitive price at home has deepened many people's suspicion that nancial markets are merely gloried casinosmanipulated by the speculators. Despite this, he courageously suggestsserious business like nance against warehouse receipts to help banksachieve their targets for agricultural lending. It surprises us that instead ofhelping the poor farmers by ensuring provision of timely and cheaper

credit, the prescription to nance against warehouse receipts is aimed athelping the rich traders indulge in hoarding of Agri-produce and buildtheir capabilities to create articial shortage of food grains in the countrywhere the distribution chain suffers serious deciencies. It would beinteresting to see whether Raghuram Rajan now charged with theresponsibility of containing the price rise and checking ination will still promote such nancing instruments which are detrimental to the corefunction of RBI, ie., to keep the ination within manageable range. It

would have served the interests of the country better if the committee hastaken cognizance of rising incidents of frauds by the traders and businessenterprises while borrowing from the banks. The complicity of

Of the 15-29 age group of youth – who number 330 million (33 crore) the unemployment rate

is 13.3%.




warehouse keepers including those owned by the government in perpetrating frauds on banks in nancing against warehouse receipts has been responsible for banks losing public money and being driven toavoidable litigations. The agencies suggested for certication of

warehouse receipts cannot be taken on face value in view of the pastexperience of the banks not only in this area but also in the area ofapproved Lawyers and Valuers who have been giving false reports to the banks for petty considerations and thus exposing the public money togreat risks. The major share of banks' NPAs is contributed by such loans& advances which are collateralized by such properties for which eitherthe Lawyers have given wrong opinion or the Valuers have given inatedvaluation.

The committee headed by Raghuram Rajan is under the illusion that theavailability of cheaper credit is the remedy for all the ills of real sector ofthe economy. It could be so in American context but in Indian context, it ismore important to ensure round-the-clock power supply at fair price toavoid lay-offs and lock-outs for want of power, reduce the excise andother government taxes, eliminate the power brokers and corruption inhigh places etc. Many industrial Units become sick in India for want ofregular power supply. It has driven many industrial houses to have their

own captive power plants which have been vying for their share of naturalresources like coal and thus giving rise to avoidable scams like 'coalgate'.If only the government had continued to carry out its responsibility of power generation & distribution at fair price, it would have served theIndian industrial sector a great deal better. The implications of the proposals of the committee are far reaching in many areas and a detaileddissertation of the recommendations will throw more light on thedangerously tending aspects of the report.

Macro Economic Framework Raghuram Rajan Committee had identied three reasons for nancialsector reforms –

(i) To include more Indians in growth process

(ii) To foster growth itself

(iii) To improve nancial stability, flexibility and resilience with aview to protecting the economy against the kind of turbulencethat had affected emerging markets in the past and affecting theindustrial countries today.

The underlying theme behind all the proposals made by the committee isthe need to enhance inclusion, growth and stability by strengthening thenancial & regulatory infrastructure. Some of the measures suggested bythe committee as 'small steps' are discussed hereunder:




(1) The need of a new paradigm in nancial sector is to recognize thatefciency, innovation and value for money are as important for the poor as it is for Indian Multinational companies and it will comefrom deregulation, new entry and competition in banking space.

The committee is of the view that the role of the government is not totake on the task that should be legitimately deregulated to thePrivate Sector but to create an enabling environment by buildingsound nancial infrastructure. It is strange that the committee hasattempted to equate deregulation of Telecom Sector with thederegulation of nancial sector with a hope to reap similar benecialresults where rewards could be much more substantial. Thecommittee is exhibiting oblivion to the fact that in Telecom Sector

the experiment could be attempted as it did not involve the publicsavings. The Banking Sector enjoys the condence of the people ofthe country who have placed their hard earned savings with the banks. It therefore becomes imperative for the banks specially thePublic Sector Banks that their funds are not deployed in vulnerableand speculative sectors which constitute the larger nancial marketin the perception of the committee. The committee's observationthat in this dynamic environment we will need skilled Regulators

who encourage growth and innovation even while working harder tocontain risks has come to such a stage where we have the chairmanof the committee as a Super Regulator in his new role as Governor ofReserve bank. The amount of attention hitherto paid to issues likecapital account convertibility, privatization etc., has led toemergence of divergent views and lack of consensus in the countryon these issues and hence the committee is of the view that the stepsto achieve these ends must be slow & steady with more focus on

small steps to create the infrastructure and carry out the process.The suggestion of the committee that the credit to SME sector could be boosted enormously if the trade receivable claims they have onlarge rms could be converted to electronic format, accepted by thelarge rms and sold as Commercial Paper as is practiced in Mexicoand could be handled through National Securities DepositoryLimited is quite similar to securitization of Sub-prime loans in theUS which triggered the nancial crisis infecting the entire world.

(2) The committee believes that the market and institutions do succumboccasionally to excesses which is why the Regulators have tovigilant, constantly nding the right balance between attenuatingrisk taking and inhibiting growth wherein US clearly failed this




time. It did not in the opinion of committee mean that the Regulatorcannot nd the right balance elsewhere and also the well functioningcompetitive market can reduce vulnerability. The members of thecommittee ought to have known that the Regulators like Monetary

Authority of Singapore are quite vigilant and hence do not permitthe banking institutions to take exposure in the rms whose nativecountry has the potential of facing vulnerability. The committeealso acknowledges that vulnerabilities may be building up in Indiaand the under-developed market and strict regulation on participation are no guarantee that risks are contained; in fact theymay create additional sources of risks, a fore warning of which maycome from recent reports of substantial losses incurred by the rm

on currency bets. It is beyond comprehension if strict regulation isnot the guarantee for containing risks in the mist of vulnerabilities,then what else is the remedy? The risks can be better contained bystrict regulations of the market and hence the committee falls shortin suggesting appropriate solutions.

(3) The foreign capital and open nancial markets are as destabilizingand prone to crisis as poor governance, poor risk management,Asset-Liability mismatches, inadequate disclosures, excessive

related party transactions and murky bankruptcy loss. The countryneeds reforms to check and avert the crisis triggered by such factors.The suggestions by the committee to open up India's debt/bondmarket to foreign investors and release the investment of bankinginstitutions in debt/bond market constitutes a perfect recipe to notonly link but expose the well founded debt/bond market to globalvulnerabilities. The observation of the committee that our macroeconomic framework needs to adjust more to a world of rapid

capital inows exposes them to the situations of recent outows offoreign investment/capital which had a substantially destabilizingeffect on our currency and markets. The more helpless argumentadvanced by the committee can be seen from its observation that itwill be impossible to control capital ows in either direction whichwill create substantial uncertainty & volatility in the market and alsothe real exchange rate which is the key factor in determining India'scompetitiveness is inuenced by the factors such as productivity,

growth and demand-supply imbalances that are not changed byCentral bank's intervention against the Dollar. In this context thecommittee felt that given that the real appreciation has to take place,the country has the Hobson's choice of taking it as ination or anexchange rate appreciation. The committee further suggests that the




Central bank can keep the market guessing about which option itwill choose and it can hop between two options – take ination orexchange rate appreciation. But creating such confusion will haveadverse effects on the market. The ination leads to higher interest

rates which hurts the growth and in the opinion of the committee, theRBI should therefore concentrate on checking ination andintervening in currency markets only to limit excessive volatility.The committee has shown ignorance about the possibility of pursuing middle path wherein the ination and exchange ratemanagement both need to be given adequate attention instead oftreating them as Hobson's choice. The committee while suggestingthe Central bank to concentrate on checking ination as the poorer

sections are least hedged against ination, is undermining the factthat India with a negative balance of payment largely on account ofcrude oil import cost will end up paying more foreign exchangewhich will lead to not only increasing the cost of imports but alsoincreasing the demand for foreign exchange with further resultantrise in exchange rate and such a vicious cycle will have signicantimpact on ination. The focus of committee's discussion appears to be only on country's competitiveness in international market

without any worry of domestic market competitiveness which offershuge potential for real and service sector owing to hugedemographics. The committee argues that we should relieve pressures from inows by becoming more liberal on outows. As acounter measure, it has been suggested to encourage greateroutward investments by Provident Funds and Insurance companieswhen inows are high as such diversication will make these fundsmore stable. Hence the relevant constituencies need to be

persuaded as by thus restricting their investment options to domesticgovernment securities, they are generally limiting future returns and possibly increasing risks. It does not make any great sense todiversify across foreign government securities to offset foreigninows into our government debt market with outows into foreigngovernment debt market without these forces driven into by RBI.

(4) The committee is of the view that strengthening, scal, nancial andmonetary institutions would reinforce each other for which the

committee prescribes principal elements of framework as under: (a) Government's scal discipline is as essential adjunct to the

process of nancial reforms. Higher public decit nancingsoaks up capital and has serious consequences for macroeconomic development and also for the nancial section.




(b) With more exible exchange rate and more exible capitalaccount, scal policy has an important role to play as a shortterm demand management pool.

(c) Disciplined scal policy – lower levels of government decit

and declined ratio of public debt to GDP are necessary to freeup the monetary policy to focus on its key objective of pricestability.

(d) High budget decit put a question mark on effectiveness,independence and credibility of monetary policy.

(5) Financial sector reforms also need to be accompanied by real sectorreforms such as building out infrastructure, reforming the labourlaws, improving the social safety net etc. The effects of the proposals made by this committee will be magnied if they can piggy-back on the real sector reforms.

Broadening Access to Finance

The committee has desired changes to the scheme of Financial Inclusion by suggesting the following measures:

(1) Instead of seeing the issue primarily as expanding credit – puttingcart before the horse, committee urges a refocus to seeing it asexpanding access to nancial services such as payment services,saving products, insurance products, ination-protected pensionetc.

(2) Direct Benet Transfer of government programmes to SB accountsof the poor to reduce leakage, help build savings histories with their banks which will then open the door to credit to poor. The

committee therefore desired that 90% of household have access todeposit account and to the payment system for smoothimplementation of various government schemes.

(3) Instead of forcing credit to the household and making them heavilyindebted, the focus should be on making them creditworthy so thatwhen opportunities & needs arise they have access to bank nance.

(4) To alter the emphasis somewhat from large-bank led, Public Sectordominated, mandate-ridden branch expansion to focused strategy

for Financial Inclusion.(5) The much needed efciency, innovation and value for money can

come from motivated nanciers who have a low cost structure andthus see the poor as protable, have capacity to make quickdecisions and minimum paper work.




The committee suggests changed organizational structure to foster suchdeliveries of services to the poor. The committee seeks more liberal entryto private well governed deposit taking small nance banks offsettingtheir higher risks from being geographically focussed by requiring higher

capital Adequacy norms, strict prohibition norms on related parties'transactions and lower concentration norms in the form of loan as a percentage of capital that can be lent to one party etc. This suggestionundermines the role of natural calamities like draught, oods,earthquakes, cyclone, tsunami, cloud bursts etc., in certain areas on aregular basis. The local area banks which could not sustain afterimplementation of Narasimham Committee cannot be expected toestablish and sustain their business models despite stipulations of strict

supervision and monitoring coupled with prompt corrective action.Though the committee recommends that these banks do not become the public charge, it is inevitable to so happen due to the factors mentionedabove. In the era of advanced technology, the distance between thecustomer and the bank is immaterial for a speedy decision making. Hencethe perception of the committee on this count is stale. The wishfulthinking of seeing the local area banks eventually grow into large banks iscompletely untenable. The committee's observation that the failure of

even few small banks will not have systemic consequences unlike thefailure of large banks and hence we should experiment with licensing ofsmall banks is not only completely absurd but is also demonstrative of theself inner contradiction as the same committee has elsewhererecommended consolidation of banks to create large-sized bank. It must be remembered that the small public savings of the customers constitutethe funding of the banking institution and failure is certainly going to hitthe customers who are not otherwise interested in systemic failure or

protection. Their loss of money is what would hurt them and not the philosophy of the learned members of the committee.

The committee has recommended introduction of sale and purchase ofPriority Sector Lending Certicates (PSLCs) towards fulllment of priority sector obligations of those banks that undershoot their targets.The imposition of interest rate ceilings make priority sector lendingunprotable. Hence reluctance to lend to priority sector drives the poor tomoney lenders. The committee is of the opinion that liberalizing the

interest rates while increasing the safeguards will help preventexploitation. The implication of meeting the priority sector lending targetsthrough the purchase of PSLCs as recommended by the committee willlead to lop-sided growth of priority sector lending only in the richgeographies thereby defeating the very purpose of the priority sector




lending goals of equitable growth and development of hitherto neglectedsectors of the society. Other suggestions by the committee as to whatshould be eligible for PSLCs and priority sector lending to the poor will be based on average interest on loans and the estimated cost of lending is

impracticable apart from being prone to manipulations.The committee has not visualized a situation where there are only buyersof PSLC in the market without there being any sellers; when thecommittee is of the view that the business of lending to priority sector isunprotable, it is more likely that such situations may arise. The socialobjectives cannot be price-tagged as attempted by the committee.

Leveling the Playing Field

The committee is of the view that the banks are favoured in certain ways

and disfavored in other ways; the competition should result in resources bei9ng allocated efciently and the society get maximum benet out of its productive resources. The interests of consuming masses may beemphasized instead of privileged producers being protected. It states thattime has come to unwind the grand bargain underlying the treatment of banks in India whereby the banks get access to low cost deposits of thegovernment in return for fullling certain social obligations such aslending to the priority sector, meeting prudential norms (SLR) that also

have quasi-scal objective of funding the government requirements. In acompetitive market the committee suggests that the government paytowards the social obligations more directly to the beneciaries. Thegreatest source of uneven privileges stems from ownership but it is also afact that while the PSBs enjoy the benets, they also suffer constraintswith later increasingly dominating. What ultimately matters is that howthe ownership structure will affect the efciency with which nancialservices are delivered. Much of the PSBs are falling behind in their ability

to attract skilled people especially at the senior level and hence theirinability to take advantage of the new technology, motivate the employeesat lower level and also to innovate. Since all these abilities are needed inthe emerging areas of opportunity, PSB's risk management capabilities being weaker could be destabilizing.

We are of the view that the ownership is important in developingeconomies as it helps in carrying out the development agenda of thegovernment more smoothly. Sentiments of the people, public and political

opinion and views of the trade unions are important and hence cannot beundermined. The issue of the ownership and consolidation of the bankshas been debated even in the Parliament and it was dropped. It is alsoimportant to own the protable business when the government suffersscal decit. The alternatives suggested by the committee like reducing




government share-holding to 33% or the concept of holding companystructure to own the public sector banks or allowing large international banks to swallow Indian PSBs aim at serving the larger interests of globalcapitalist agenda without any reason or rhyme. Such attempts will also

make the banking a costly proposition. It is desirable to enhance the levelof the corporate governance and autonomy of the boards of the PSBs,improve technology to reduce time and transaction costs, take them out ofCBI and CVC purview as the nature of the business is commercial anddecisions are taken in the prevailing circumstances. The nature ofcommercial decision being discretionary is subjective to a great extentand the decision takers are invariable booked on the basis of hindsight.There urgent need to enhance the training capabilities and opportunities in

PSBs to avert frauds. It needs to be understood that bankers are not superhuman beings to detect the fraudulent intentions of every fraudster.Hundreds of frauds averted go unnoticed and one failure is used to ruinand shatter the life and career of the ofcers. Rationalizationaccountability policy is considered a single most important reform toenhance the speed and efciency of PSBs. It is important to remember thatall the banks in private sector do not have the best levels of efciency andeven the new generation banks do not have exactly same levels of

competitive strength. The thought of privatization to bring aboutefciency and competitiveness is thus misplaced.

The perception of the committee that PSBs are not able to attract the bestof the talents is far from the fact as elsewhere the committee itselfobserves that PSBs have historical ability to attract talent and manyformer ofcers of PSBs are holding high positions in Foreign and NewGeneration Private Banks. The negative opinion expressed by thecommittee can also be contrasted against the reality that even the

recruitment of Probationary Ofcers to ll up about 52000 vacancies inthe current year attracted more than 22,00,000 applications and theselected candidates included a majority of Engineering Graduates & PostGraduates, MBAs and possessing other higher and professionalqualications. There is also greater need to internalize the post ofExecutive Directors and Chairman and Managing Directors to avoidunhealthy practices pre and post selection apart from preventing thecultural invasion causing de-motivation among the top supporting

management. Futility of dual control of the banks by the Government andRBI was also emphasized by Narasimham Committee too. But there wereno takers then and there will be no takers even now. The Government may probably be happy if RBI renounces its control on the banking system infavour of the Government. Will RBI Governor experiment in this eld by




sending some experts from RBI to strengthen the Government ControlMechanism?

After analyzing the relevant aspects of Narasimham and Raghuram RajanCommittees' recommendations, we now proceed to respond to the issues

covered in RBI's Discussion Paper.1. Small Banks Vs Large Banks (Mergers and Consolidation)

We have Regional Rural Banks and Urban Cooperative Banks atlocal level to cater to the banking needs of the people. Under the newliberalized branch licensing policy, the PSBs have opened largenumber of branches in rural, urban and unbanked centres. With theliberalization of branch licensing continuing and focus on nancialinclusion further growing, we expect larger integration of rural

economy in the mainstream economy of the country. That is what adeveloping economy needs. Raghuram Rajan Committee views theIndian Banks as relatively small vis-a-vis the international banksmerely on the grounds that only one Indian Bank(SBI) nds a place

thin top 100 global banks and that too at 80 place. There is need toreview such perception. The size of assets which is the basis ofranking the banking institutions is measured in terms of value in USDollars. Here comes the role of exchange rates. If the currency of a

country is weakening against US Dollar, the valuation of assets ofthe banks of the country will also deteriorate. That is what has beenhappening to the ranking of Indian banks internationally. FourChinese Banks nding a place among top 30 banks is largely onaccount of appreciation of their currency against US Dollar and not because merger and consolidation in their banking sector. It isimportant to understand that the size of the business of banking islargely related to the size of economy of the country. In this context

the Raghuram Rajan committee itself observes that the size ofcapital of 10 biggest Indian Banks to 10 biggest Indian Corporationsis not disproportionate to the ratio elsewhere in the world. Thisratio is 2.72 in India as against 2.45 in USA. As long as the bankinginstitutions in the country are capable of meeting the credit needs ofthe economy, the size of the individual banks does not matter. Thereare huge sanctioned but unavailed credit facilities in the Indian banking system and it is a testimony to the capability of our Banks to

meet the credit needs. The consortium, multiple banking and loan-syndication coupled with ECBs are adequately serving the purposeto meet even larger credit needs of the corporate.

The thought to initiate any move to merge or consolidate PublicSector Banks under such circumstances is unwise and aims to




benet foreign banks through intended takeover of Indian Banks at alater stage as envisaged by Raghuram Rajan Committee.

2. Universal Banking

Financial Sector in India till the advent of globalisation and nancial

sector reforms had Commercial Banks and also DevelopmentFinancial Institutions to meet the credit needs of different segmentsof Industry. The Development Financial Institutions like IDBI,ICICI, UTI etc., saw reverse mergers with their off-springs andstarted universal banking which later on spread to CommercialBanks too. It has created problems like liquidity, asset-liabilitymismatch on one hand and scarcity of trained personnel to handlelong term/infrastructure nancing on the other. The job-rotation

policy, transfer policy etc. mandated by Ghosh Committee, CVCand the Government even in the case of ofcers recruited in thespecialized functions have only added to the woes of the bankmanagements in PSB. The awakening to have differentiatedlicensing particularly for infrastructure nancing, wholesale banking and retail banking seems to be a belated thought whenalmost all the banks have exposure to infrastructure nancing/longterm project nancing. Segregation will pose serious problems,

which will need smart solutions. The differentiated licensing willhelp improve quality of credit as standard of appraisal will improve.

3. Continuation Authorization

Commercial Banking is a sensitive sector as it involves nancialintermediation. Dealing with public money calls for extra care. Therole of the Regulator is also important. The present level ofcompetition in Indian banking space seems to be quite adequatewhere various categories of the banks enjoy a fair market share as

under: SBI group : 24%

Nationalized Banks : 46%

New Generation Private Banks : 15%

Old Private Banks : 7%

Foreign Banks : 8%

In such an environment there is no pressing need to allow licensing of

new players either in the private sector or in foreign sector. The entryof foreign banks either through the branch licensing route or throughthe subsidiary licensing route may be evaluated on the reciprocal basis. But there is hardly any scope to permit more banks in privatesector. The licensing in any case must be 'block licensing' and not




'tap licensing' whenever there is a need to expand the sector onmerits and in changed scenario. The mismanagement andconsequent disappearance of Global Trust Bank, Times Bank,Centurian Bank, Bank of Rajasthan, Lord Krishna Bank etc., from

the Indian Banking space must be taken as a lesson before grantingnew licenses.

4. Conversion of UCBs into Commercial Banks

The cooperative sector bank failures have been very common phenomenon in different parts of the country. In many cases thePSBs were directed to rescue the depositors by taking over the failedor failing cooperative banks. It would be worthwhile to explore the possibilities of take-over of UCBs by PSBs and free them from the

local political interference and protect the public savings. Thetransfer of technology in such an eventuality will also improve thelevels of efciency of the branches and bring down the cost ofoperations.

5. Presence of Foreign Banks in India & Indian Banks presenceoverseas

The number of foreign banks having their presence in India is morethan the number of public sector banks or private sector banks

individually operating in the country. Hence there is no strong casefor permitting liberal entry of more foreign banks into Indian banking space. It is however felt that as a global players India mayadopt a balanced and reciprocal approach in deciding on this issue.Similarly the Indian Banks may be encouraged to expand overseaseither by opening branches or by adoption of subsidiary routeincluding joint ventures as done by three PSBs by incorporatingIndia International Bank, Malaysia a couple of years ago.

6. Government OwnershipRBI in its Discussion Paper has desired an optimal ownership mix inthe banking sector to promote a balance between efciency, equityand nancial stability while observing that there is a better pay off inenabling PSBs to improve their performance. Simultaneous growthof Private Sector banks will instill a fair amount of competition inthe banking sector. The argument of reduction in scal burden onaccount of recapitalization of PSBs does not sound logical as the

government collects much more amount in the form of aggregatedividend from PSBs. If the PSBs are relieved of political and bureaucratic interference and larger autonomy is allowed to theirBoards, the protability of PSBs will increase. It will eventually




bring down the demand for recapitalization by PSBs. The strengthof PSBs with Government ownership was widely acknowledged bythe then RBI Governor and the Finance Minister on the oor of theParliament for withstanding the economic crisis of 2008 and thus

remaining unscathed. The options from the menu of choices such asnon-voting equity shares or differential voting equity shares oradopting holding company structure or diluting government stake inPSBs are unwarranted tinkering with the well settled capitalstructure of PSBs.

7. Indicative Reorientation of the Banking Structure

The 4-Tier banking structure suggested by Narasimham Committeeand also by Raghuram Rajan Committee is an oft-repeated

prescription available in the market for last two decades. But thereare no takers for the same which is an indication of its futility in awell established Indian Banking space. What is being suggested bythe Discussion Paper released by RBI is largely description of theexisting structure of banking in the country. Even today we haveBanks like State Bank of India, Bank of Baroda, Bank of India andIndian Overseas Bank having presence in several globalgeographies apart from their Pan India presence. The remaining

PSBs are having presence in India with little or no presenceinternationally. They thus constitute the second Tier. The third Tiermay comprise NewGen Private Sector Banks leaving the RegionalRural Banks to constitute the fourth Tier. It leaves us with UrbanCooperative banks and Old Private Sector banks which are a goodcase for nationalization or take-over by PSBs. Such a move willsave the Cooperative banks from interference by local politiciansand Old Private Sector banks from exploitation and intermittent

take-over bids by Interested Groups/ Private Business Houses. Itwould be worth emphasizing that our Old Private Sector banks have been serving the nation by functioning largely on the lines of PublicSector Banks and have played a sterling role in upliftment of sociallyneglected sectors of the society while achieving the priority sectorgoals/ Financial Inclusion. Their contribution in nation buildingneeds to be recognized. They also have pan India presence. Theirnationalization or take-over by Public Sector Banks will help

maintain equilibrium in the banking space.




Current Economic scenario andchallenges of the Banking Sector

- Dr. Victor Lewis Anthuwan, LIBA

(Excerpts of the speech made on 14th August 2013 on our 48th Foundation Day)It is a great day for us. 14th August 1947 we made a tryst with destiny......

The Colonial era came to an end. The greatest man of our country had adream- the dream to build a Ram Rajya and to wipe out every tear fromevery eye. “As long as there is poverty, inequality and untouchability, wecan't remain quiet” told Pandit Jawaharlal Nehru.

I want to greet you and thank you for remembering this day which is alsoyour Foundation Day. Today, let us ask few questions. Have we wiped out

every tear? Millions of houses have been built because of your signature, but millions are still homeless. Millions received agriculture loans because of you and green revolution was possible because of you. Therewas a time when we imported wheat and other food items. Today weexport grain because of you.

You are not sitting in Mount Road, Chennai. Arunachal to TrivandramGauhati to Patiala you are spread out. Because of you Green Revolutionand export of grain became possible. Many large scale industries were

built with your assistance and through your SME loans millions of SMEs benefited. Thanks to you for all the prosperity. I see your signature, yourvision and your sacrifice in all the developments.

I want you to be happy & blessed You deserve much more than what youare getting.

Privatisation of Banks is on the anvil. They will entice Officers withdouble the salary they are drawing now. They will ask them to take alltheir HNW customers and the profile details of all the customers. Afterone year, unachievable targets will be given and they will be sent out.People have done that earlier and later became jobless. It is totallyunethical, nevertheless they do it.

Per employee business and per employee profit are often quoted and saythat Public Sector Banks are not efficient. SBI employees and other PSBemployees deal with backward, SC, ST and poor people. They sanctionthousands of loans to people of these categories. Comparison betweenPSBs and private Banks and Indian Banks and foreign banks is wrong.Compare the equals not the unequals. The service you are rendering is notcomparable. you require different norms for PSBs, SBI and private andforeign Banks. You have social objectives, they do not have. We shouldnot compare these two. You are ten times more efficient than any one ofthem.




It is 66 years since we have attained independence. From 1757, India waslooted by foreigners. For almost 200 years India was destroyed.Agriculture was annihilated. East India Company converted communityfarming into individual farming. Common property became private property. Asiatic mode of production was destroyed. We have a glorious past - 2 lakh years before people lived in India. We knew of Agriculture forthe past 9000 years. We had 36000 varieties of Paddy. In the 1st centuryIndia was the richest and even in the 17th Century, India was the richest inthe region. 25% of world income was from India in 1700. The world wasafraid of India. .

We had the technology for Industrial development. 5 years back in aHandloom weavers exhibition in Andhra Pradesh, a 6 yard Handloomsaree was given in a match box to a Minister. Dakka Muslin 20 yard - 3 ft x1 yd breadth could be kept within your ring. Pyramids had Dakka Muslin.The finest textile was from our country, Algebra, Numeral, Trignometry,Zero etc. came from India. We were the leaders in Maths, Metallurgy andmany other sciences. Delhi Iron Pillar was installed 1400 years back. Tillnow, it has not rusted. so we had people who knew the technology toremove sulphur from iron. We were leaders in Medicine. 2600 years backCharaka and Sushruta conducted cataract operation. Sushruta speaksabout plastic surgery. He gave a nose to a man by plastic surgery. We wereleaders in Astronomy. Aryabhatta knew that the earth goes around the Sunin 365¼ days. He was wrong by a mere 15 sec only. Our literature and philosophy are as good as the best in the world. Mahabharatha is greaterthan many world epics. Thirukural lends advice to Kings and ordinarycitizens.

But, by 1947, we were one of the poorest, 200 years of foreigners' ruledestroyed everything. Lord Mcalay said “I have never seen such wealth,

and people are so good that no locks were seen at home and everybody ishealthy. Break their system, to do that - change the pattern of education”.They did it, so that we lost our leadership and became mere followers.Mcalay's prophecy should go.

We have to change the education system. We had great leaders like Mr. C.Subramaniam, who told that we were not provided the right kind ofeducation. He asked the government to provide Japanese model ofEducation. Lala Lajpathi Roy was a Trade Union Leader who espoused

the causes of the workers and died because of Police brutality. He had agreat vision for the country. Thanks to their vision.

Last 66 years, thanks to our MPs, teachers and Banks, India has beentransformed. 11th five year plan had only 8% growth, China had 11 to12%. In 1975, we had 9%, growth under Mrs. Indira. During 11th five




year plan, we have proved 8%, growth is possible. If we grow at 8% wecan over take Japan in 2020. By 2025 we can become third richest in theworld. China 1, US 2, India 3. By 2050, we can become second richest, by2060, we can over take China. India will be richest in the world. Do wehave the road map? Is it possible?

We have the largest number of children. youth is our asset. 70% of the population is below 45, 50% below 25 and 30% below 15. In Othercountries aging is a problem. Next 50 years we will have the largestnumber of youths. Give skills to them.

But what is happening? Education is commercialised, Commerce isVulgarised, Women are Commoditised and Politics Criminalised.

Everywhere in the world subsidised free education is available for theircitizens. What should be in Private is with the Government here. Whatshould be with Government is privatised. Education is in the hands of business men. I thank the Association for running good schools. Invest inyour children, make youth physically strong, mentally sharp and morallyupright. Ambedkar worked 16 hours per day in London University.

In Europe, Saturday and Sunday they disappear from office and spendtime with family. We don't let them rest and we don't spend time with

them. We are sacrificing our youth to make them earn more money.Students earn more than their teachers. They work 16 to 18 hours per day.Physically they are not strong and morally they are not upright. But thereis no national debate on that. A morally upright society is needed to reachour goals. But, everyday, we hear about scams which are sickening .However, vast majority of the people of this country are good and honest people. No corruption and no dowry should be the goal.

Transparency international, the global Civil Society Organisation leading

fight against corruption has placed India in the 88th rank. Sweden and Norway stand in one and two. There is no corruption.

We require emotionally balanced youth. They cry and fight or they arealone. A false sense of feeling is there. We have to pay attention to that. Adeep inferiority complex is building in the youth of the Country.Spirituality should not be a mere ritual. In spirituality, all religions aresame. Teach the youth to start living for others-Husband for wife-both forchildren and all for the society. In the Upanishads, a king says “I am proud

of my kingdom. No beggar, no thief, no one drinks alcohol, nogambling”. We should strive for the ideal world.

As Trade Unions go beyond Branch Bank Save your nation. Pay attentionto the youth. Let us live for others.

'Indians are rascals, they are unfit for freedom', said Winston Churchil.After victory in the 2nd world war in 1947 we got freedom from the




Labour Party of Britain. We killed Gandhiji immediately after that.Churchil said, “that is why, I said they are not eligible for freedom” Wehave to prove him wrong. Children are to be taught values. You have arole, and you can transform the country. You are a great leader and the best forum that has 10 lakh employees in the Banking sector.

The growth of our economy today has come down from 8% to less than5%. In 1950, the growth was 3.5%. During 1900-1947, the growth wasless than 1% per annum. Nowhere you have such a model banking system.In 1975, the GDP growth was 5%; in 1980, 9%; in 1990, 6%; in 2000, 7%.It was 8.9% in 2008. After that the mistakes of converting public sector to private sector instead of encouraging entrepreneurship and inadequateinvestment in infrastructure Govt. has brought our growth down.

We are de industrialising ourselves. We have 27% of National Incomefrom Industry, but from manufacturing it is 16% only. We havemarginalised Industry. More import of finished products takes place. Weexport iron ore to China and import Iron products. By doing that, we areexporting job, when we ourselves want it badly. We have importedRs. 1,200 cr. worth of apples in a year when the farmers of HimachalPradesh struggle by not knowing what to do with their apples. With USand Australian apples, we have destroyed our farmers. We were exportinggrapes but now we are importing.

Vinayaga Chathurthi, gives opportunity for our artisans to get somemoney by selling their idols. Now, we are importing them from Chinaand deny opportunities to our own artisans. Can't we make Vinayagastatues? Importing crores worth of them. Statues of Saraswathi and Kaliwere also imported for Durga Puja. Small artisans are in a loss today andwe have Balance of Payment crisis. 10 years back, we let Import of Gold.Last year 950 tons worth more than 60 billion $ was imported i.e. thecause for BOP crisis. Today we have imposed curb on import of Gold.

90% of the Gold is in lockers and bed rooms. Only 10% is in jewellerymarket. This 90% of gold lying idle is enough as capital forindustrialisation. FDI comes to make profit. It will not make us rich. Last 2years 22 billion $ was the outflow of foreign funds as royalty. FDI alonewill not solve our problems.

Origin of the 2008 Economic Crisis: Stock markets are vulnerable andwill continue to be volatile. Let us have a look at the World Economy. In1860, there was progress and in 1870 there was a great Depression; in1920 the economy did well and in 1929 there was depression; in 1970sonce again there was good growth and in 1980 there were troubles- in1987 Banks failed. On an average, once in 6 years there is collapse, because capitalist economy is not a planned economy.




Alan Greenspan, the Secretary to the Treasury in US told 8000 small and big Banks to go and lend money for investing in Shares. The share priceswent up. Many times this was repeated. Later he asked the Banks to lendmoney for homes. The Interest rate went down from 6.5% to 1%. Peopleinvested in big houses. Demand went up. 2nd loan and 3rd loan weregiven for the same house up to 95% of the value. Loans called NINJA (NoIncome, No Job Accounts) loans were given. Loans were given in 5minutes. Then, he asked people to use credit cards and spend money.People spend money using their credit cards and could not pay back.Rating agencies increased the rating artificially. Managers and Chairmansof Banks got huge commission. New assets called derivatives wereintroduced. The Chief Executive Officers of the Banks encouraged theseloans. Soon the system collapsed, because people did not have therepaying capacity. People handed over the keys of the houses to the Banks.Banks could not realise the loan. Fannymae and Freddymac, two Banksthat extensively funded the Housing Sector collapsed. Lehman Brotherswhich was a 180 years old bank also failed. AIG (American internationalGroup) the giant American Insurance Company also failed. Slowly morethan 1000 banks went down. The whole economy melted, People lost their jobs and homes and slept in cars and streets in Florida.

We were not following that model because there was opposition from thetrade Unions. There was also opposition from the RBI Governor Y.V.Reddy. Reddy was criticized for not following the American model. Buthe did not relent. When he retired every country invited him. Universitiesabroad wanted him to visit them. Nobel Laurette, Joseph Stiglitz stated“Had Venugopal Reddy been the Chairman of the US treasury, we wouldnot have got into trouble.” But once again we are talking about reformingPublic Sector Banks, which will lead to only a collapse.

Now, let us see our foreign exchange position. There is a deficit of 200 billion dollar in our export import. Our foreign exchange reserve is 280 billion dollar. Next year we will have to repatriate 170 billion dollars.This will lead to a crisis. What are we importing. Last one year weimported Rs. 25000 crores worth Electronic goods. Can't we produce hereand create employment? We imported Rs.1000 crores worth Alcohol. Weimported Rs.1200 crores worth Apples. We imported gold worth 62Billion $. We imported oil for 120 Billion $.

80 % of our oil is imported. We keep giving loans for cars. We don't havegood roads, we don't have good parking place but we have cars. What isthe return we get from these cars. We are creating a crisis. Can't we useautomobiles with alternative energy. Can't we stop import of gold?. Can'twe stop import of Alcohol?




Foreign institutional investors play havoc in the securities market. Themarket cannot be sustained with their presence. They will dump securitieswhich will lead to crises like it happened in Indonesia, Turkey and Italy.Value of Rupee has gone down because of their intervention. This has leadto further inflation. Price of petrol has gone up because of the fall in thevalue of the Rupee. But it is the poor innocent Indians working in the Gulfwho contribute to the forex. They remit 60 Billion $ per year. Theresavings is the largest.

Inflation will not come down. Our interest burden per annum is Rs.3,40,000 crores. We don't have money for investment because we need toservice huge loans. When there is no investment, there can not be increasein employment.

We have to come out with new ideas. We have to stop importing gold ortax import of gold. We can collect the gold from the people and give them bonds. Sell the gold in the international market. We can buy when it isneeded. Stop import of apple and other non essential items. Once we havesurplus, Rupee value will go up. Transport prices have to be reduced.Everything will become cheaper. Today TATAs, Mittals and Ambani's areinvesting outside. They should be asked to invest in India. Create moreindustries in India. The Economy will grow. Infrastructure projects worthmore than 1 lakh crores are stalled. Developing infrastructure will createemployment. By having 2 ways lines for the Railways our transport problem can be solved and reduce consumption of petrol. Switch over toalternative technologies like solar which can be subsidised by theGovernment and bring down the cost of Energy. Strengthen agriculture,and small and medium enterprises. Only Banks can do it. Banks have adeposit of more than 75 lakh crores. For what we lend is important. Thereare 10 lakh employees. If every employee introduces one new depositor

and one new borrower ten crore accounts will be introduced in one yearand 40 crores in 4 years. Give loans for production and not forspeculation. In Japan, the Bank credit is twice that of the national income.Let us abolish black money which is 30% of our national income i.e.60,000 crores. Bring back 450 billion dollars lying in Swiss Banks. LetCBI do it. Some researchers say that 1 trillion $ are lying with foreign banks. Lend money for economic activities which will createemployment, wipe out poverty and liberate women. Work honestly and

with a purpose. We can change the country. We can become a model forthe world. You can do it.




Charter of Demands - Highlights

(a) The Charter of Demands has been broadly divided into Six Parts -

(1) Salary Revision and allowances; (2) Perquisities, Allowances,welfare facilities; (3) Issues relating to lady ofcers; (4)Superannuation benets including those to be extended to retirees;(5) Non Monetary issues like working hours, 5 days week etc; (6)General Bilateral Relationshi

Part I : Salary Revision and Allowances :

(b) The Charter suggests that the present seven scales be reduced to 2

scales as follows:- a. Scale I – Manager Grade – integration of the present scale I to IV;

b. Scale II – Executive Grade – Integration of Scale V,VI and VII

(c) It suggests that like Government servants, Grade Pay be introducedfor taking up higher responsibilities in the bank;

(d) DA neutralization should be increased from present 100% to 125%and thus conversion factor be recalculated accordingly;

(e) DA should be revised on monthly basis depending on the monthlyindices released by Government;

(f) Demands that CPI (IW) for qe 30thSept 2012 at 4876 be taken forthe purpose of merger of DA for construction of scales;

(g) A mid review of scales be undertaken at the end of 2 ½ years (i.e. on30/04/2015) and DA merged on the lines adopted by PayCommission;

(h) It is suggested that Profession Qualication Pay be introduced forother qualications (in addition to CAIIB) like BusinessManagement, CISA, Treasury Management, Technology, MCA,LLB, Risk, Audit, Costing, HR etc.

(i) FPP be defreezed and payments be made more liberal for FPP;

(j) HRA : Payments be made as per 6th Pay Commission on area wise basis. In view of wide gap between leased amount and HRA in lieuof housing accommodation, HRA should have correlation to prevailing leased rentals. HRA on capital cost basis be based on

current market price of property and should be 200% of normalHRA. Self house should be allowed to be leased;

(k) Ofciating allowance should be 10% of the last stage of the scale;

(l) There should be at least 20% increase of the Basic Pay andAllowances on promotion from one Scale to other;





(m) CCA should be between 15% and 20% depending on the area of posting;

(n) Allowance of 20% of Basic Pay for rural postings;

(o) Closing allowance equal to 15 days of their salary once in 3 months;

(p) All ofcers should be eligible for travel by Air with SeniorManagement allowed to travel by Executive Class;

(q) Annual increments should be sanctioned on 1st January / 1st July

Part II : PERQUISITES, OTHER ALLOWANCES

AND WELFARE FACILITIES:

(a) Post Allowance : 25% of Basic for Branch Managers and 20% to

other ofcers;(b) Risk Allowance : Lending risk to all sanctioning authorities at all

grades; (No amount specied)

(c) Disturbed Area Allowance : 20% of Basic Pay

(d) Medical Reimbursement : Scope of family to be enlarged andAnnual Medical Aid to be enhanced (No amount specied)

(e) Hospitalization Charges : Actual expenditure be reimbursed andmore ailments and surgeries be included in the list for

reimbursement;(f) Leave Fare concession : All ofcers to be allowed by Air and senior

management by Executive Class. Encashment should be actualexpenditure he / she would have incurred had the ofcer traveledactually by entitled class. No income tax on such encashment.

(g) Special Allowances : These should be revisited and other centresand higher amount be paid; Hardship allowance be redened.

(h) ExGratia should be introduced and at least one month's gross salary

be paid to al(i) Commercial Banking Allowance : As commercial banking

involves risks, ofcers should be paid Commercial BankingAllownace like in RBI (central banking allowance

Part III : Issues concerning Lady Ofcers

(j) A separate transfer / placement policy should be designed for ladyofcers and give choice of their place. Flexi time and exi placeconcept be allowed for lady ofcers. Lady ofcers should beaccommodated at the place where their spouse is working;

(k) Creche facilities should be provided for lady ofcers;

(l) 3 months additional leave be allowed to ofcers over the age of 45years;




(m) Paternity leave of 30 days on 2 occasions should be introduced;

(n) Scope of family be increased for LTC / HTC and medical facilities;

Part IV : Superannuation Benets

(o) Pension should also be allowed to be paid on the last pay drawn or10 months average, whichever is benecial to the retiring ofcer;

(p) DA be converted as Basic Pension as and when the cost of livingindex increases by about 50%.

(q) Upgradation of pension above 80 years of age should be madeavailable;

(r) In respect of all earlier retirees, improve the present Basic Pension

as per mutual understanding(s) Commutation : Should be revised to 40% and full pension restoredafter 10 years;

(t) DA neutralization should be at par with serving ofcers;

(u) VRS should be available in the Pension rules also;

(v) Pension scheme should be extended to all those who have beendenied earlier on the basis of misinterpretation of the understandingreached with IBA

(w) Additional serviceof 5 years be extended to all retirees;(x) Family Pension should be at par with Govt and be at 30% of last

drawn pay. Be paid for 10 years or till 70th year of notional age ofthe deceased;

(y) New Pension Scheme : Original pension should be paid even toofcers who have joined 01.04.2010;

(z) Gratuity be paid at rate of one month salary and allowances andwithout any ceiling and exempted from payment of income tax;

(aa) PF should be at the rate of 12% of total salary and allowances.Should be payable to all employees;

(bb) Encashment of Leave : Upto 360 days encashment be allowed to allclasses of retirees and exempted as to central governmentemployees;

(cc) Medical scheme for pensioners / retirees should be framed on thelines available to EDs and CMDs

(dd) Welfare Activiites : Separate allocation be made for welfare of pensioners and facilities like Holiday Home, clinics, transit house be made eligible for pensioners also;

(ee) LFC / HTC facility : Extend the same to all retirees




Part V: Non Monetary – Issues Relating to Working Environment :

(ff) 5 Days Week : Banks should adopt 5 days week;

(gg) Working on any day beyond 7 hours, should be paid at double thenormal rate and

(hh) Ofcers required to work on weekly off days should be monetarilycompensated and allowed a weekly off also;

(ii) Leave should be made more exible

(jj) CL be increased to 15 and additional 10 days of Restricted holidays be allowed to ofcers;

(kk) Ofcers be permitted to encash the entire leave on retirement

including sick leave and no ceililng be imposed for accumulation ofleave. The ofcer may be permitted totransfer leave to otherofcers in case of medical purpose

(ll) Outsourcing : Work done on regular basis should not be outsourced

PART VI : General Bilateral Relationships :

STRUCTURED FORUM AND ACCOUNTABILITY FOR SETTLEMENT:

Certain Industry level issues have to be discussed at IBA / Government

Level. Hence, there is a need to have structured forum at IBA /Government for periodical discussions. Hence, there is a need to bring allsuch issues/directives of the IBA and the Government before a structuredmeeting and settle to avoid frequent agitation and industrial unrest in the banking industry.

RECRUITMENT / RETIREMENT:

The Banking industry is in doldrums due to inadequacy of the workforce.The lopsided policies and the conventional approach of the Government

and the Managements of the banks at the instance of the IBA and theMinistry of Finance have created a big gap in the average age of thevarious groups of employees in the banks. There were no recruitmentsvirtually for more than 2 decades and as a result, the age difference between the old employee and the new employee is so wide that theaverage age of the workforce is adversely affected.

A crash programme should be worked out to tackle this serious issue.

In view of shortage of manpower, the retirement age should be re-xed.

We have the following suggestions:- VOLUNTARY RETIREMENT:

Redene the voluntary retirement and re-x the minimum eligibility forthe purpose.




AGE OF SUPERANNUATION:

The age of superannuation to be raised to 65 years for all ofcers.WITHHOLDING OF GRATUITY ON RETIREMENT / RELEASEOF TERMINAL BENEFITS :

The present adhoc system of withholding gratuity and harsh decision toset off the gratuity amount towards loss caused etc., should be reviewedkeeping in view, the recent judicial pronouncements. In any case, thereshould not be stoppage or denial of gratuity to the ofcers. No disciplinaryaction should be initiated after superannuation.All Terminal benetsshould be released pending disciplinary proceedings if bank fails tocomplete the proceedings before superannuation as is being done in thecase of CBI cases being pending.

WELFARE FACILITIES:CEILING :

Present Ceiling of 3% of net prots to be increased to 5% of net protwithout any ceiling.LIFE COVER :

Suitable Life Cover should be taken for normal as well as accidentaldeath.REVIEW OF LOANS AND ADVANCES :

In view of the increase in cost of construction of house and ats, we needto have a comprehensive review of House Building Advance to ofcers bysuitably enhancing the limit to Rs.50 lacs at Simple rate of interest withoutany slab. Since the Conveyance Loan has not been revised for long, weneed to enhance the Car Loan limit to Rs.10 Lacs and Two Wheeler Loanlimit to Rs.1 lac at Simple rate of interest without any slab. The repaymentof the above loans should be extended upto 75 years of age.ROAD TAX ON VEHICLES:

In view of All India transferability of ofcers, the Road tax on vehicles ofdifferent States should be paid by the bank on inter-state transfers.DATE OF RETIREMENT:

Those who were born on the 1st of a month to be retired on the last day ofthe same month, and not the previous month.PROTECTION OF EMOLUMENTS:

The emoluments drawn by an Ofcer should be protected on his transferfrom one place to another.

TRANSPORTATION OF PERSONAL BELONGINGS:The Banks should take the responsibility for shifting the personal effectsof the ofcers on transfer from one place to another. In the absence of suchfacility, the Ofcers should be reimbursed the full expenditure oncerticate basis.




INCIDENTAL EXPENDITURE ON TRANSFER:

To meet additional expenditure towards education of children, housingetc., ofcers should be paid two months' salary to compensate incidentalexpenses on transfer. In case of transfer outside the State, 3 months' salary

should be paid towards incidental expenses. In case of transfers to far offcenters and the places of inclement weather and living conditions, therehas to be high compensation as incidental expenditure on transfer.OTHER ALLOWANCES SUCH AS HILL AND FUEL ETC.

All the allowances other than what have been covered in the earlierchapters should be enhanced appropriately.AREAS DECLARED AS SEZ/NEZ/EPZ:

The branches coming under the above areas should be treated on par with

Metro Centres for all allowances and perquisites.SPECIAL ALLOWANCE TO NORTH EAST, SIKKIM ANDOTHER DISTURBED AREAS / NAXAL PRONE AREAS:

Special allowance as prevailing in Central Government/RBI for Ofcersserving in these areas should be extended to Bank Ofcers.I M M U N I T Y F R O M T R A N S F E R P O L I C Y , S P E C I A LP R I V I L E G E S T O O F F I C E - B E A R E R S O F T H EORGANIZATION:

The Ofce-bearers of Associations should be extended immunity fromtransfer/placement. The Central /State level ofce-bearers should begiven duty-off on par with workmen organizations. The facility is due forreview.THE LOAD FACTOR:

The negotiations on cost of salary revision should be conned only for the purpose of deciding the load factor in respect of Basic Pay and DearnessAllowance.

DATE OF EFFECT:The date of effect for implementation of the settlement on the basis of thecharter of demands should be from 1.11.2012.RIGHT TO SUBMIT SUPPLEMENTARY CHARTER:

The Ofcers' Organizations reserve the right to include, amend or alter thedemands, as made out in the Charter during the course of bilateraldiscussions.

All anomalies arising out of Salary Revision should be resolved

irrespective of the cost factor involved.Long pending issues on regulated working hours, 5 days week andstandardization of retirement benets and improvement inCompassionate Appointment Scheme should be discussed beforecommencement of regular wage revision negotiations.

banking sector reforms - retrospect and directions for future

Documents