FE Editorial : Gee, Mrs G

The Financial Express
Posted: Saturday, Nov 22, 2008 at 2337 hrs IST
Updated: Saturday, Nov 22, 2008 at 2337 hrs IST

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: Yes, there are banks that were legends of western private finance that are receiving state help now. Yes, Sonia Gandhi’s mother-in-law did nationalise Indian banks and, therefore, created a situation where even today private banks are a small minority in Indian finance. But no, the two together absolutely don’t imply that India is safe from the financial crisis because Indira Gandhi stopped us from being too clever or too greedy. Let’s list the arguments. First, public ownership or strong government associations are no guarantees, per se, against ultra-sophisticated financial engineering. Fannie Mae and Freddie Mac were government-supported enterprises in the US that were part of and, indeed, in some ways, one of the causes of the subprime crisis. The Harshad Mehta stock scam in India saw public sector banks as merry participants. The real question is not ownership, but incentives and regulation. India’s banking regulation and its financial incentive structure didn’t permit or encourage financial engineering of the sort seen in the US. So, if we have to thank anyone, RBI and successive finance ministers seem more appropriate candidates. But, and second, do we really have to thank even these people unreservedly? Public sector banking and extra-tight regulation are reasons why India is massively underbanked. Plenty can and should be said about predatory lending in the subprime crisis. But let’s envy the dynamism of a system that got poorer Americans into organised finance. Poor Indians are left out despite, and because of, sarkari banking.

Third, the big question that Indian politicians pretend doesn’t exist: can an economy that had ambitions of growing at 9% regularly make do with a banking system such as ours? Once the credit crisis is over—and it will be—Indian industry will again be looking out for big financial arrangements. An SBI can’t handle a Tata-Corus deal. So, business will go to foreign banks again. Just as American finance has to count the cost of too much innovation, Indian finance should know the cost of too little innovation. Fourth, and probably the most important, Indira Gandhi’s ‘vision’ that created nationalised banks also produced Indian socialism. The partial dismantling of that system is the reason India rediscovered its economic self. Romanticising a part of that vision legitimises the frightening whole. As her Prime Minister will tell Sonia Gandhi, that’s dangerous.

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» Bank nationalisation

Posted by S K Modi on 2008-11-24 13:12:49.816635+05:30
SirThere are arguments in favour too. Nationalised banks have provided finance to SMEs at a far larger scale than would have been possible otherwise and that is the reason why we have a middle class today. In Harshad Mehta case also, bunglings by nationalised banks were limited because there were (and are) controls on adventurous bankers. India now has an ideal scenario where private and state-owned banks are co-existing. Let private banks handle deals like Tata-Corus and let nationalised banks provide services to those who aren't interested in super returns. Successive finance ministers have tried to privatise banks but mercifully they haven't succeeded. The present system should be allowed to continue.

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