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Business News/ Opinion / Indian banking, warts and all
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Indian banking, warts and all

The week that was for India's banking sectorfrom Punjab National Bank posting record losses to DN Ghosh's book on bank nationalization

Photo: Aniruddha Chowdhury/MintPremium
Photo: Aniruddha Chowdhury/Mint

By any yardstick, last week has been eventful for the Indian banking sector.

State-owned Punjab National Bank (PNB) announced a record 5,367 crore loss for the quarter ended 31 March. There have been another half a dozen banks, majority owned by the government, which have announced thousands of crores of losses even as the pile of bad assets has been growing.

Also, industrialist Dilip Shanghvi has given up his plans to launch a payments bank—the second instance of an in-principle licence for a payments bank being surrendered. The Reserve Bank of India (RBI) issued 11 conditional licences last year. In March, Cholamandalam Investment and Finance Co. Ltd had given up its licence.

These are unfolding stories. Most bank managements do not know whether the worst is over on the bad loan front. Similarly, nobody will be surprised if yet another payments bank licence holder decides to withdraw from the fray as the right business model for such banks seems to be still elusive for many.

For a change, let me talk about a book written by D.N. Ghosh, a bureaucrat in the ministry of finance who was associated with many challenging assignments in the financial sector, including heading the State Bank of India (SBI). If not for anything else, one can read No Regrets (Rupa Publications) for the gripping account and behind-the-scenes story of bank nationalization. Ghosh’s book also narrates the tension between RBI and the finance ministry over regulations and supervision of banks, the politics of appointments of bank directors, and consolidation in the public sector banking industry—issues that are extremely relevant today.

On the night of 17 July 1969, P.N. Haskar, principal secretary of then prime minister Indira Gandhi, was looking for someone who he could trust and discuss the implications of bank nationalization announced by Gandhi a few days earlier in Bangalore. Then economic affairs secretary I.G. Patel and RBI governor L.K. Jha were ignored and the person chosen for this purpose was a relatively junior bureaucrat, a deputy secretary of the banking division in the ministry of finance, Ghosh. The plan was to do this by an ordinance in a couple of days as then president of India V.V. Giri was to step down on 20 July.

Incidentally, it was not the first attempt to nationalize India’s banks. There had been a move to nationalize five major banks in 1963 and Ghosh had that draft ordinance in his custody.

Fifteen major banks operating in India then, including the National and Grindlays Bank, had about 85% share of the deposits. The decision was to nationalize all of them barring Grindlays and compensate the private owners following a formula adopted for converting the banks in the erstwhile princely states into subsidiaries of SBI. The amount of compensation for the 14 banks was 87.40 crore.

In Parliament, the plan was passed with a minor change that ensured representation of employees, depositors, and agriculture, exports and small-scale industries on the boards of nationalized banks. Predictably, the move was challenged in the Supreme Court. The focus of the 34-day trial at the court before a bench of 11 judges was on the definition of banking: Can a bank offer guarantees, safe deposits and businesses such as money transfer beyond taking deposits and giving loans? Those who were opposing nationalization of banks wanted the government to allow the private owners of the banks to keep the non-banking activities with themselves. Had they won the case, the purpose of nationalization would have been defeated. The charters of the three presidency banks—the banks of Bengal, Bombay and Madras—which had outlined the scope of banking beyond taking deposits and giving loans came to the government’s rescue.

After nationalization of the banks, the banking department was created—a perennial source of conflict between RBI and the government. While the central bank felt that overseeing the activities of the commercial banks was its responsibility, the government was of the view that the transfer of the ownership of the banks was not a technicality; it signalled the government’s willingness to take greater responsibility in running them. Ghosh was the first occupant of the new department.

While his colleagues would wonder whether the government could afford to leave everything to RBI, Ghosh seemed to have strong reservations about the central bank’s capability. It was “miles away from revolutionary transformations in banking policy". As a young and impetuous officer, he had often found RBI’s “extra cautious approach perplexing", and he “could not figure out why it was so very lenient with recalcitrant banks".

Political influence on the selection of bank chiefs and board members has been a reality even though former finance minister Y.V. Chavan had wondered: “Why do you want to create a situation where unemployed politicians would knock at my doors for these posts?... Do not allow either politicians or bureaucrats to eye for posts within the nationalised banking sector."

Ghosh’s book talks about a finance minister who had appointed three directors from Hazaribagh, his constituency. He also wrote how V.N. Kak, better known as Ramji Kak, involved with many organizations promoting tourism in Rajasthan, got into the board of PNB. The bank’s chairman S.C. Trikha’s comment on him was: “Ramji made a distinctive contribution to our board meetings. He taught us the art of serving tea and the graces that should accompany it."

Large-scale and compulsory mergers of banks started in early 1960s. Even before that, in mid-1950s, Bank of Baroda ran the risk of being made a subsidiary of SBI. And, sometime after bank nationalization, a bureaucrat (Nirmal Chandra Sengupta) felt 14 banks were far too many for effective control and they should be consolidated into four—one each in east, west, north and south—managed by joint secretaries. The idea did not find any takers then.

Is the government ready for consolidation? Will it opt for privatization of some of the banks as it does not have the money to capitalize them? No Regrets offers valuable insights into India’s banking sector and the role played by the government and RBI in its evolution.

Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of Sahara: The Untold Story and A Bank for the Buck. His Twitter handle is @tamalbandyo

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Updated: 23 May 2016, 02:28 PM IST
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