Growth of banks from 1947 to 2017
by BA & Dr Venkatesh Sundaram
In the last few years, we have seen the merging of several public sector banks and the creation of a small number of giant banks. The reason given by the Government for this is to “increase the global competitiveness of the Indian banks”. In the present digitised age, and especially after the demonetisation of 2016, most working people in India have bank accounts. Are the measures of merging of banks and consolidating their operations designed to help the common people? What is the nature of the banking industry? What is its’ recent history in India? What is the outcome of mergers and consolidation in the banking industry here and abroad? We shall try to examine some of these in this two – part series.
The banking business essentially borrows money at lower rates of interest from thousands of small bank account holders and lends them at higher rates of interest to borrowers. Funds are needed by various segments of the economy – from peasants and small shopkeepers to small and medium entrepreneurs and businesses to larger enterprises and large corporates and monopoly houses, not to mention municipalities, state governments and even the Central Government itself. In general, larger borrowers get more favourable terms. Banking is essentially a profitable business. Only if borrowers do not pay the loans and interest back to the bank in time does a problem arise – that of default and ‘non-performing assets’ or NPAs.
While the larger banks are regulated by the RBI, the hard-earned money of a large portion of the public is invested in a number of smaller and cooperative banks which are largely outside the control of the RBI most of the time, until a severe problem arises. Just over a year ago, the scam in the Punjab and Maharashtra Cooperative Bank caused severe distress to many people who had deposited their hard earned money and life savings in it. A few even died because they had trusted the bank with all their savings and did not have access to their own money when they needed it for urgent medical treatment. It was a grim pointer to the fact that when banks fail in India, it is the small depositors who pay the price! At the present time, a couple of other banks too have been placed under restrictions by the RBI and depositors do not have access to their own funds deposited in them. It needs to be noted here that problems of NPAs and scams are not restricted to public sector banks alone – we have seen them in large private banks like ICICI and Yes Bank too!
An idea that rather widespread is that any Public Sector Industry or Bank is necessarily a white elephant and not capable of being efficiently run. But the fact is that quite a few of the public sector companies and government-owned banks have been profitable too! This can be seen from the great interest shown in big business circles whenever ‘Navaratna’ public sector companies or bank shares are offered for sale, and in the surging prices in stock markets.
When Prime Minister Indira Gandhi nationalised large private banks, she told the Lok Sabha, on 29th July 1969, that the “purpose of nationalisation is to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas”. Laudable sentiments, indeed. This meant that state-owned banks would have to ensure that a certain percentage of their lending went to farmers and small-scale industrial units. However, in practice, such lending made up only a minor part of overall bank loans. The nationalised banks lent a major part of loans to big industrial houses over the decades, while small entrepreneurs and peasants continued to have problems of funding.
Before nationalisation, the private owners of banks could not afford to or just did not make investments necessary to spread the banking network from the cities and big towns into the countryside where over 75% of the population lived then. By investing in opening branches in smaller towns and big villages, the banks increased their catchment area, from where they could get funds. These funds, obtained at relatively low cost, were lent to big corporate houses who used them to increase their operations. They were able to develop the home market for consumer goods, capital goods, agricultural equipment, machinery, automobiles, and many other sectors. Over the decades, these big corporates grew even bigger, multiplying their wealth several-fold. We may therefore not be wrong in concluding that this was one more instance of the so-called ‘socialist’ pattern helping the richest get even richer while handing out sops to others.
In the mid-eighties, the big business houses of India were no longer shy of investing in sectors which had high gestation periods like infrastructure and power. In fact, by the 1990s, they started venturing abroad too. This was the period where they vigorously called for “liberalisation and privatisation”. Soon, sectors like life insurance and banking were ‘opened up’ for big capitalists. A few private banks like ICICI and HDFC were opened – which over the years aggressively expanded their networks and grew rapidly over the next two decades. Government owned banks were also listed on stock exchanges. No longer were these nationalised banks tied down even formally by constraints of “lending to priority sectors, small scale industries and agriculture” – they were encouraged to compete aggressively with the private banks and earn more profits.
Thus, we see that banking, though termed as a ‘service’ for everyone, is essentially a highly profitable business. Risks in lending are passed on to small depositors who sometimes do not have access to their own hard earned money in times of need. The nationalisation of banks carried out in 1969 helped the banks to expand their network and access funds from small towns and villages. The result was a larger base or source of funds for the big industrial and business of the time, who grew even bigger and increased their assets several hundred-fold over the next few decades. Governments no longer felt the need to cloak their intentions in ‘socialist’ language. With the liberalisation of the nineties the setting up of large private banks, nationalised banks were also competing with them to earn profits. In a few years, the stage was now set for mergers and consolidation of the competing entities, from 2017 onwards. In the next part of this series, the way this was carried out in the last couple of years and what is being envisaged in the future, and the implications for the economy and people will be examined.