There has been a lot of self-congratulation in India about the country?s escape from the financial crisis. It is claimed that our financial system is sound because it is not allowed to indulge in the sorts of things American and British banks do. Indeed, the Congress president was even quoted as crediting the miracle to Indira Gandhi and the nationalisation of banks in 1969. The PSU banks are no doubt happy and smug as they sit on vast deposits and no serious business except doling out consumer loans and buying government debts when required.
Yet, the news last week of global ranking of banks should be a sobering one. In 2000, most of the top 10 banks in the world were American or British. In 2009, they are Chinese or Brazilian with only one American bank in the top 10. No Indian bank is in the top 20, let alone the top 10. Indeed, there is no Indian bank in the top 50. Chinese and Brazilian banks do not exist in environments all that different from the Indian one. Some of the ranks will slip when the Western banks recover their strength as they seem to be doing already, looking at the size of the bonuses they are giving out. Yet the changing global balance of banking from the West/ North to the East/South finds India absent at the top table.
This weakening of the Indian banking industry has been a matter of policy. While India escaped the worst of the 2008-09 crisis, there has been a huge cost paid along the way over the last 40 years. The entire debate about financial exclusion is there because the PSU banks failed to implement the very purpose for which they were nationalised. The real reason for the nationalisation was, of course, that Indira Gandhi wanted to provoke the resignation of Morarji Desai and split the Congress. The evidence for this is in the memoirs of IG Patel who was in the finance ministry at the time and had to draft the legislation within 24 hours, as I have cited in The Rediscovery of India.
In that way the move was a success. The Congress did split and India had a banking system that is a captive of the party political system. But the idea that banks had to be nationalised so that they could serve the rural economy has been honoured merely in the breach. Banks, I am told, manipulate their targets for agricultural lending by loaning to fertiliser corporations! The lack of credit for farmers and for small businesses has been shown by many reports. Farmer suicides in the middle of the last decade were caused by the high cost of credit, among other reasons. These farmers were still relying on moneylenders.
Thus, it is not that the rural area is excluded unless you define inclusion as having a PSU bank account. The rural area is served but by the private informal sector, that is, moneylenders who have been villains in Bollywood movies for decades. The moneylender is the champion of know-your-customer since he adapts the terms and conditions of the loan to each customer?s circumstances, something which the banks requiring horrendous form-filling cannot do. (This phenomenon has been analysed in economic theory by Stiglitz, Maskin and others whereby the less creditworthy get served by the Mafia or the extortionate moneylenders.) The bankers in shirts and ties cannot reach the farmers in their dhotis, but the moneylender is not only in a dhoti but also knows the village well.
Of course, lately microfinance institutions have intermediated in this respect and they are growing at a huge rate?somewhere between 75-90% per annum, I heard quoted recently. They get accommodation from the banks so this may be a belated response to the problem. But it is clear that innovations have to come from outside the PSU banks. It may be that a way should be found for ?barefoot moneylenders? who can be itinerant from village to village and lend money on the spot. Perhaps some foreign-owned bank will implement this since I doubt that the PSU banks will do so.
I also doubt that there will be any move to pursue the global ranking race so that by 2019 India could have a bank or two in the top 20. Not unless there is a massive divestiture or even bold consolidation. But even the modest proposals for consolidation being debated now face so many bureaucratic hurdles?ministerial committees and what not?that I would not hold my breath. The banks were nationalised not to serve the people but to serve the politicians, and this they do very well.
The author is a prominent economist and Labour peer