Deepening crisis of the banking system – what is the cause and what is the solution?

The scandal involving the Punjab National Bank, numerous other Indian banks and diamond businessmen Nirav Modi and Mehul Choksi has once again brought the crisis of the banking system to the centre-stage of public debate.

The ruling class wants to exploit this particular scandal which involves public sector banks to push the erroneous and dangerous notion that privatization is the way to lift the banking system out of crisis. As far as the working class and broad masses of people are concerned, the problem is that both public and private banks are not fulfilling the function which the people expect from them. They are not protecting the hard-earned savings which people have deposited with them. Far from protecting such deposits, banks are colluding with capitalist profiteers to loot the people!

Let us examine the facts relating to the PNB scandal. Foreign branches of several Indian banks have in recent years repeatedly advanced huge amounts of foreign currency loans to a set of diamond trading companies owned by Modi and Choksi. The total outstanding amount of such loans is estimated to be Rs, 11,400 crore. These loans were advanced on the basis of 293 Letters of Undertaking (LoUs) issued by the Punjab National Bank over a number of years.

The loans extended were supposedly for the purpose of financing the import of diamonds. However, it is to be noted that over-invoicing of diamond imports has been used for whitewashing black money. Much of the borrowed money is suspected to have been used for purposes other than importing diamonds.

Repeated advances by numerous banks on such a massive scale could not have taken place without the knowledge and approval of the highest level of authority within the concerned banks and the Government of India. However, it is only some retired and serving bank employees who have been arrested, not anyone at high levels of authority.

The Government of India is propagating the falsehood that this scandal is an aberration, an exception. However, the massive size and persistent rise in bank loans that are not being repaid show that the loot of people’s bank deposits by greedy capitalists is not an exception but the general rule.

The Union Cabinet has approved a Fugitive Economic Offenders Bill, to be tabled in the parliament. This Bill seeks to confiscate and sell all assets of economic offenders who run away to some other country. The Government of India has also announced the setting up of a National Financial Reporting Authority. This new authority is supposed to monitor the working of chartered accountants who audit the finances of large capitalist companies, private and state-owned, including the banks.

The Government of India is trying to convince people that the problem is not with the banking system as a whole but only with a few individual capitalist robbers and weaknesses in the audit function. It is also keen to convey the impression that it is seriously going after those who loot millions of Indians and run away from the country. However, it is the Government of India which let these fugitives leave the country in the first place.

It is to be noted that the aggregate amount looted by Mallya, Modi and Choksi together adds to only 2 or 3 percent of the total loot that has taken place in the form of capitalist loan defaults over the past decade.

Capitalist companies have for many years been borrowing huge sums of money from commercial banks and defaulting on repayment and interest. The problem remained hidden from view until the Reserve Bank compelled all commercial banks to identify “Non-Performing Assets (NPAs)”, or bad loans, in their financial accounts.

It has by now been revealed that more than Rs. 4,00,000 crore of NPAs accumulated by private and public sector banks, have been waived over the past 10 years. More than double that amount remains to be tackled. The exact amount of outstanding NPAs keep changing as some of the bad loans are “restructured” and then declared to be no longer non-performing. In 2014, for instance, the RBI issued a notification allowing commercial banks to roll over loans for infrastructure projects, converting 5-year loans to 25-year loans. In spite of such manipulation, outstanding NPAs are estimated to be between Rs. 8,00,000 and 10,00,000 crore.

The huge magnitude of these numbers shows that the problem is not confined to a few bad elements, as is being made out by the official propaganda. Nor is the problem peculiar to public sector banks alone. The problem is that the entire banking system and the entire State is in the service of the biggest capitalist monopoly houses and their aggressive pursuit of maximum profits by any means, legal or illegal.

State monopoly capitalism

What exists in our country is a system of state monopoly capitalism. About 150 capitalist monopoly houses dominate the State and finance the principal parties in the legislative bodies. The State acts in the interest of the monopoly houses, while presenting itself as the protector of the people’s interests.

The monopoly houses have their representatives sitting on the boards of directors of both public and private sector banks. They also sit on the Board of the Reserve Bank of India. So-called independent directors are loyal agents of one or another monopoly group. Senior bureaucrats who function as directors and CEOs of public sector banks are offered lucrative post-retirement positions by the capitalist monopoly houses.

When peasant farmers and small-scale producers approach a bank for a loan, they are made to run from pillar to post. They are asked to mortgage their property as security with the bank. They lose their property if they cannot repay on time.

When the Tatas, Birlas, Reliance or some other capitalist monopoly house approaches a bank, the senior-most management team headed by the CEO welcomes and salutes them. Loans are arranged without any property being mortgaged.

When big capitalist projects yield a huge profit, the capitalist borrowers service their debt to the banks and pocket the net profit. In times of a downturn, the biggest and most well-connected borrowers default on their debt service payments, claiming to have suffered losses. Some of the biggest loans get restructured or waived altogether. The burden is shifted on to the backs of the entire people by the Government spending public money to “recapitalize” the banks.

In sum, the root cause of the problem of NPAs lies in the monopoly capitalist system, in which banks play the role of agencies for maximizing capitalist loot. The problem has become more aggravated in recent decades because of the State opening up all avenues for maximum capitalist loot, under the banner of globalization, liberalization and privatization. All commercial banks have come under pressure to expand their lending activity as rapidly as possible and compete to achieve the highest rate of profit. Huge sums of money have been loaned out for all kinds of speculative profiteering projects of the capitalist class, headed by the monopoly houses.

No justification for privatization of banking

Alongside the drama of enacting a law to catch fugitives, and of strengthening the audit function, the Government of India is carrying out the lying propaganda that public sector banks are corrupt and privatization is the way out.

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The problem of NPAs is by no means confined to public sector banks. In 2008, private banks headed the list of Indian banks with the highest ratio of NPA to total outstanding loans (Chart I). By the year 2015, however, private banks had been assisted by the Government to shift their burden onto various public sector banks. Public sector banks have become the ones with the highest bad loans ratio (Chart II).

Shifting the burden of NPAs from private to public banks is part of a deliberate plan of the monopoly houses, implemented by successive governments at the centre. The aim is to drive some of the state-owned banks to bankruptcy, as a prelude to their privatization.

International experience shows that private ownership of banks is no solution to periodic crises. The global crisis which broke out in 2008 was precipitated by the activities of private banks and private financial institutions in the United States. In all the capitalist countries where banks are privately owned, there are close ties between the heads of the biggest capitalist borrowers and the biggest banks. Loans are arranged in closed-door deals. Private banks speculate with people’s monies, and when they collapse, the State spends public money to bail them out, because they are “too big to fail”.

The real motive underlying the call for privatization of public sector banks in our country is the unbridled greed of the monopoly capitalists for maximum profits from all possible activities. The monopoly houses are eager to grab the huge profits that can be made from the banking business in India.

To have the State invest in creating a public banking system served the big capitalists in the past. It served to develop the home market for capitalist industry and to convert household savings into finance capital. Now the big monopoly capitalists want to take over and run the banks themselves and pocket maximum profits from financial intermediation. This is the real motive underlying the drive towards privatization, while it is presented as if it is a solution to the problems of the banking system.

Real Solution

The solution to the problem lies in reorienting the banking system and the entire economy towards fulfilling the growing needs of the people, instead of fulfilling monopoly capitalist greed. The means of large scale production and exchange, including banking, needs to be taken out of the hands of capitalist monopolies and placed under social ownership and control. The allocation of bank credit could then be based on an overall economic plan and not left to the profit calculations of monopoly capitalists and their representatives.

In order to implement such a revolutionary transformation, the working class needs to capture political power, in alliance with the peasants and all the oppressed. Only then can the economy be reoriented. Only then can secure livelihood and prosperity be guaranteed for all. Free of exploitation and with political power in hand, the working people will guard public property and people’s deposits from being looted by anyone.

With this exciting perspective, the working class must unite and escalate the struggle against bank privatization and all forms of monopoly capitalist loot. We must unite in defence of the people’s right to security of their savings.

Notes on the evolution of the banking system in India

Modern commercial banks were initially set up in British India in the 19th century – the Bank of Bengal in 1809, Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks were subsequently merged to form the Imperial Bank, which was nationalized and renamed the State Bank of India in 1955.

The Reserve Bank of India was established in 1935, with the functions of a central currency and banking regulator. That was followed by the establishment of several major private banks including the Punjab National Bank, Bank of India, Canara Bank and Indian Bank. The RBI, originally set up as a private shareholders’ bank, was nationalized in 1949.

Between 1947 and 1955, as many as 361 private banks failed. Those who had deposited their savings with these banks lost all their money.

By the decade of the 1960s, there was one big state-owned commercial bank (State Bank of India) and numerous big private banks owned by various capitalist business houses. Only a tiny share of household savings was being deposited in banks. Bank credit was extended almost entirely to the business enterprises owned by the capitalist industrial houses. The share of bank credit to agriculture remained as low as 2.2 percent
in 1967.

The capitalist class, headed by the monopoly houses, recognized the need for commercial banks to establish an extensive branch network in rural areas in order to expand the base for capitalist development. There was a need to extend credit to capitalist farming and to concentrate the savings of rural households and convert them into finance capital. Private banks had neither the interest nor the capacity to invest in a rural branch network.

In 1969, 14 big private banks were nationalized; and six more in 1980. It was marketed by the Congress Party, headed by Indira Gandhi, as being an allegedly socialistic action. However, the result of bank nationalization was the further development of capitalism and the accumulation of enormous wealth in the hands of the capitalist monopoly houses. They gained control of the entire savings of the nation through the State-owned banks.

Starting in the 1990s, there has been a slow but sure shift towards privatization of banking. First, new private companies were allowed to enter and expand in the commercial banking sector. Second, all public sector banks have come under increasing pressure to resort to outsourcing and intensified exploitation of their employees in the name of global competitiveness. Third, public sector banks have been saddled with multiple burdens so as to wreck some of them and prepare the ground for privatization. By now, this process has reached a stage when there is a loud and open clamour for cutting down the number of public sector banks to expand the space for private banks.

 

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NPA    Apr 1-15 2018    Political-Economy    Rights     2018   

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