No. 61, June 2015

Nos. 61
(June 2015):

Rising Corporate Military Complex in India

Making Room in India – for Whom?

Bank Board Bureau: Another Step toward Privatisation and Foreign Takeover

Public sector banks: Reform by Death

Bank Board Bureau: Another Step toward Privatisation and Foreign Takeover

The finance minister said in his recent Budget speech:

In order to improve the Governance of Public Sector banks, the Government intends to set up an autonomous Bank Board Bureau. The Bureau will search and select heads of Public Sector banks and help them in developing differentiated strategies and capital raising plans through innovative financial methods and instruments. This would be an interim step towards establishing a holding and investment Company for Banks.

What exactly is going on?

The finance minister is merely proceeding to implement the recommendations of the Reserve Bank of India’s Nayak Committee, submitted in May 2014. This Committee, supposedly set up to review the governance of bank boards, is in fact an aggressive manifesto for the denationalisation (i.e., privatisation) of public sector banks.

The Nayak Committee calls for the Government to set up, first, a Bank Boards Bureau, as an interim step to a Bank Investment Company (BIC). The Government would transfer its shareholding in banks to the BIC. The Committee strongly recommends that the Government reduce its stake below 50 per cent; among the arguments it advances are that this will give the erstwhile public sector banks a free hand with labour, as well as remove them from the purview of the Central Vigilance Commission and the Right to Information Act(!). So much for the illusion that neoliberal ‘reform’ brings about greater transparency.

The Government would sign a shareholder agreement with the BIC setting the latter’s objective solely in terms of financial returns from the banks it controls. In other words, the Committee wants the Government to become a passive investor, a coupon-clipper concerned merely with making money from its holdings in the banks. The CEO of the BIC would be “a professional banker or a private equity investment professional who has substantial experience of working in financial environments where investment return is the yardstick of performance”, i.e., a private banker. The CEO would put together his staff team. “BIC employees would be incentivised based on the financial returns that the banks deliver.”

Government as coupon-clipper?
This is indeed a breathtaking prescription. If the Government merely wishes, like some sharemarket investor, to maximise its financial returns from its investments in banks, why should it bind itself to banks? Why not churn its investments around the capital markets like any speculative fund, seeking the highest returns? Or if it must for some reason remain tied to banks, why not shift those banks to the more lucrative business of wealth management of the Ultra High Net Worth Individuals? Productive economic activity may collapse, no doubt, but the banks’ shareholders may still make money, which, in the Committee’s view, is the sole purpose of the banks.

Since nationalisation, public sector banks have been expected to pursue not merely their own profits but development objectives, such employment, financial inclusion, agricultural investment, industrial development, poverty removal, and the execution of various other Government schemes. Over the course of liberalisation since 1991, these objectives have been greatly reduced by the Government, but not yet eliminated. By contrast, foreign banks and private Indian banks have been allowed much easier targets in these spheres, and have concentrated on money-making opportunities in metropolitan centres. The Nayak Committee finds an ingenious way of scuttling these development objectives (a precondition to their being privatised): it complains that such objectives place public sector banks on an ‘uneven playing field’ against the private/foreign banks. And so: “The Government should also cease to issue instructions to public sector banks in pursuit of development objectives. Any such instructions should, after consultation with RBI, be issued by that regulator and be applicable to all banks” – knowing full well that this would mean in practice the winding down of those objectives.

Handing over public sector banks to casino capitalists
The Committee says the RBI should designate a specific category of investors in banks as Authorised Bank Investors (ABIs). The Committee’s proposed list includes nearly all manner of casino capitalists: pension funds, long-only mutual funds, long-short hedge funds, exchange-traded funds and private equity funds (including sovereign wealth funds). In other words, it wishes to invite into India’s public sector banks the very speculative forces which blew the global bubble of 2001-2008, precipitated the ensuing (continuing) world financial crisis, and compelled unprecedented State bail-outs of banks throughout the world. The Committee proposes to place such speculators and hot-money managers on the boards of erstwhile public sector banks. Of course, it stipulates that if the RBI finds out, post facto, that any such investors were not ‘fit and proper’, it could ask them to disinvest. (“It would be impractical for either RBI or a bank to conduct a prior scrutiny on whether an investor is ‘fit and proper’ before an investment occurs.”)

Indeed, the Committee proposes outright handover of some banks. For banks identified by RBI as ‘distressed’, it recommends that private equity funds be permitted to take a controlling stake of up to 40 per cent. Since the Nayak Committee has labeled the entire public sector banking industry as being in a “fragile” state, and the Government itself has labeled half the banks “below average” and unworthy of being recapitalised, this proposal could have sweeping implications.

The Committee envisions the entire process – of destroying the remnants of the public sector banking system – as taking just two to three years. The Union Budget for 2015-16 shows that implementation of the Nayak Committee proposals is under way. Further, the Government has now advertised for the post of Chairman and Managing Director (CMD) in five public sector banks (Punjab National Bank, Bank of Baroda, Bank of India, Canara Bank and IDBI Bank). The eligibility criteria, in terms of age and qualifications, have been framed so that not a single public sector bank official fulfils them. The Government evidently proposes to air-drop private bankers into the CMD posts in order to carry out the transition to the private sector.

As already mentioned, the first main implication of this process is that the remaining developmental and social obligations of the public sector banks will be given a hasty burial. Although these obligations had no doubt been whittled down over the years of liberalisation, doing away with them altogether will have grave implications for vast sections of society.

Secondly, this process will expand the foreign share of the Indian banking system. Loose talk of the public sector banks’ “fragility”, and selectively starving half of them of funds, create a sense of crisis; that helps the authorities ram through changes that would face opposition in ‘normal’ times. Crises in third world countries are opportunities for foreign investors: Foreign banks today control large shares of the banking sector in Latin America and Southeast Asia, much of the increase coming in the wake of financial crises in those regions during 1996-97.

Reshaping the financial system
Three committee reports commissioned by Raghuram Rajan after becoming Governor of the RBI have laid out a dramatic re-shaping of the financial sector. The Nayak Committee lays out a course for the privatisation of the public sector banks, albeit under the guise of improving their governance. The Patel Committee restricts the objective of the country’s central bank, the RBI, to keeping inflation in a narrow range (sidelining other objectives such as ensuring economic growth and promoting a healthy pattern of development.¹ The Mor Committee maps out a course to give every person a bank account so as to facilitate cash transfers. While talking of providing ‘access’ to credit, it aims to eliminate enforceable targets and lower interest rates for the sections starved of credit – agriculture, small industries, etc..

The thinking underlying these recommendations is essentially that finance must not be ‘repressed’ and forced to serve a developmental programme of society. Rather, left free to pursue profit unhindered by State direction, finance will best gather the savings of society and most efficiently direct them where they need to go. ‘Efficiency’ here is equated with private profitability, which is of course very different from social benefit.

Apart from abandoning the channeling credit into socially necessary sectors, the release of “financial repression” can give rise to broader financial instability. The world financial system has just witnessed the consequences of the massive misallocation of credit and mismanagement of risk by the world’s leading private financial entities, carried out with the knowledge that they will be bailed out by the State. This experience should have brought home certain messages to even those within the system: that markets are not necessarily ‘rational’; individual ‘rationality’ (isolated pursuit of individual interests) in the market does not imply collective rationality; individual behaviour itself is not necessarily rational even in a narrow sense; increasing sophistication and complexity of financial instruments may serve no purpose but to increase the role of speculation and thus financial instability.²

It should be noted that, in two previous international financial crises, the 1997-98 southeast Asian crisis, and the 2008 global crisis, the relatively ‘repressed’ Indian banking sector was far less affected than its more ‘liberated’ counterparts in other countries. Further, as the latest Economic Survey has been forced to acknowledge, the bulk of the Indian public has failed to switch to private banks even during the height of the 2003-08 boom; “and of course,” the Survey notes, “in the aftermath of the Lehman crisis, there was a flight to safety toward the public sector banks.” The financial liberalisation being pursued by the RBI and the Government is no doubt the long awaited dream of the international financial sector, but may turn out to be a nightmare for the Indian public.

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