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Banking Sector Reforms

Retrospect and Directions for Future

Tamilnadu State Unit
[Tamil Nadu State Unit]
C/o. SBI Ofcers' Association (CC), Telephone : 25227170
State Bank Buildings, 25228773
# 84, Rajaji Salai, Fax: 25261013
Post Box No.1992, Telegram :SUPSTAFF
Chennai 600 001. E-mail: sbioacc@yahoo.com

All Letters to be addressed to the Secretary:

To All E.C. Members / Members: 5th April2014

Dear Comrades,

With all their faults, trade unions have done more for humanity than any
other organisation of men that ever existed. They have done more for
decency, for honesty, for education, for the betterment of the race, for the
developing of character in men, than any other association of men
Clarence Darrow
We are glad to bring out this booklet during this time of the 16 General
Elections for wide discussion among all for the betterment of the citizens
of the country. It contains our thoughts on the impact of Reforms in the
Banking Sector and our alternatives, a note on ve day week which is the
dream of every bank employee, the need for rejection of attempts to
introduce cost to company in the Banking system, the alternative to the
RBI's policy on Banking sector and excerpts from a visionary speech of
Dr.Victor Lewis Anthuwan.
This booklet should be read by every comrade in the Banking sector so
that our vision is translated into action. This should be presented to
politicians and policy makers and we should pursue the demands till they
are achieved.
Our State Committee appeals to you to revitalise the district committees at
the earliest.
Together we will achieve our goal. Our Unity Long Live.
A wise and frugal government, which shall leave men free to regulate
their own pursuit of industry and improvement, and shall not take from the
mouth of labour the bread it has earned this is the sum of good
Government Thomas Jefferson



Banking Sector Reforms 1

Appeal to the Political Parties and Policy Makers 3

Banking Sector Reforms 6

Retrospect and Directions for Future

Note on Five Day A week & Regulated Working Hours 57

Note Opposing Cost to Company 61

AIBOCs response to RBIs Discusion Paper on 65

Structure of Banking in India - The Way Forward

Current Economic Scenario and Challenges of 83

the Banking Sector

Charter of Demands - Highlights 89

Banking Sector Reforms 2

Appeal to Political Parties
and Policy Makers
Provide Autonomy to Public Sector Banks and focus on
social Banking & Development Banking. Notional cost of
social banking should be taken into account while
assessing their performance.
Stop giving Bank licences to Corporates taking into
account the recommendations of various committees and
the vested interest they may serve.
Take Action on Corporate Bank defaulters Publicise their
names and initiate action against the major share holders
Stringent laws are to be enacted to tackle NPA menace.
Implement 5 day week in all sectors including Banking
Sector taking into account International experience,
alternate channels of banking available and employee
Bring clear guidelines for Micro Finance and monitor
through NABARD & RBI. Micro nance bill should be
discussed with all stake holders.
Bring NBFCs and Nidhi companies under total control.
They are misusing public money and depositors are at
risk. Initiate action against their misdeeds. Supervision
need to be improved.
Provide autonomy to RBI and scrap the recommendations
of Financial Sector Legislative Reform Commission.
No merger of Public Sector Banks in the name of
consolidation. Learn from the failures of many large size
banks in US.
Nationalise old generation Private Sector Banks so that
they serve the Nation better. Stop move to hand over them
to Foreign Investors
Stop outsourcing of Regular works in the interest of labour
as well as the security aspects which are needed in
banking business.
Banking Sector Reforms 3
Provide decent wage hike to Bank Ofcers and employees.
Today they are paid less than the Government employees
as well as private sector employees.
Strengthen Co-operatives and provide adequate support
to them. Do not interfere with their performances.
Provide adequate support to NABARD and expand its
functions in rural development and rural credit.
Expand rural branch network of Banks so that under
developed rural areas get an uplift and real nancial
inclusion takes place.
Ensure full implementation of priority sector lending (45%)
including 18% to Agriculture 1% to the weaker section @ 4%
interest by all Banks.
Improve Rural Credit Deposit Ratio uniformly in all states
especially in States where it is abysmally low.
Redene nancial inclusion with focus on access to credit
and not just opening an account.
Stop RBI proposal to allow foreign banks to enter India in
a big way as this will enable them to take over our Banks
which is against national interest.
Government of India has passed the Banking Regulation
(Amendment) Bill in the Parliament neglecting the strong
protest by trade unions in the banking industry and
various political parties. The amendment which is
against national interest has to be repealed.
Right of participative management extended to trade
unions in Public Sector Banks should be made available
to private sector banks which will strengthen and
accelerate the growth trajectory of these Banks.
Private Sector Banks are handling public money. They
are also regulated by RBI. The reservation policy should
be applied strictly to them also.
Government of India is a founder member of
International Labour Organization which is yet to ratify
certain conventions and treaties. Convention 87 dealing
with Freedom of Association and Protection of Right to

Banking Sector Reforms 4

organize and Convention No.98 dealing with Right to
Organize and Collective Bargaining are to be ratied by
the Government immediately.
Bank retirees are being denied periodic upward revision
of Pension as against the retired Government employees
and many other Organisations in which similar pension
scheme is applicable. This is highly unjust and
discriminatory. To enable the Bank retirees to have a
decent living, there is a dire need for periodic updation of
A study reveals that around 60% of gross prot of Banks
is transferred as provisions every nancial year.
Stringent laws and mechanisms to be put in place to
arrest the menace of NPAs and place the details of
defaulting borrowers on public domain.
Introduce women friendly promotion and transfer
policies and provide Child care leave as applicable to
Central Government employees.
Bank ofcers and employees working in the clearing
houses under the Check Truncation System are forced to
work seven days in a week and they are deprived of
Uniform holidays. Uniform holidays should be provided
to all bank employees.
The employees of RRBs perform similar functions of
Commercial Bank employees. Their Salary and service
conditions should be similar to other Bank employees.
Recruit adequate ofcers and staff in Banks taking into
account the need for expansion and large talent pool
available in the country which has high unemployment.
Bring back black money which is kept in foreign
Scrap new pension scheme and provide assured pension
for all.
All India Bank Ofcers' Confederation
Tamil Nadu State Unit

Banking Sector Reforms 5

Banking Sector Reforms
Retrospect and Directions for Future
D. Thomas Franco Rajendra Dev
In the Name of Banking Sector Reforms !
Banking Sector plays an important role in the development of the
economy of the country and creates impact on the lives of the people.
Countries with robust banking sector have become developed economies.
Agriculture, trade and industry depend on the Banking Sector for their
growth. As on 2013, Australia has 31.8 bank branches per one lakh
population, Belgium 42.4, Brazil 47.3, Bulgaria 61.2, Canada 24.4,
Cyprus 97, France 38.8, Italy 64.4, Japan 33.9, New Zealand 33.3, Spain
85.1, Switzerland 48.8, United States 35.3 whereas India has only 11.4
branches per one lakh population. Even after 67 years of Independence
India remains an under banked country. Only 58% of the Indian House
holds and only 31% of the Indian population have bank accounts. For the
country to ourish and become one of the leaders of the world economy,
our country needs better banking facilities with the dominance of public
sector banks which alone practice social banking and cater to the lower
strata of the society.
Now let us analyse the growth of the banking sector with a look into the
past before independence, after independence and after 1991 when the so
called reforms started , the present status and put forward our vision for
the future.
Before Independence
Before Independence money lenders had a eld day. Central Banking
Enquiry Report 1929 explains how the farmers who constituted the
majority were totally dependent on the money lenders who were the one's
nancing inputs for agriculture, purchase the produces and had hold on
the land which was mortgaged to them formally or informally. Punjab's
legendary scholar Malcom Darling stated in 1925 that the Indian peasant
if born in debt, lives in debt and dies in debt. The exploitation of the
money lenders who were also the land lords had made the farmer totally
dependent on them in the absence of a Banking facility.
Studies have proved that rural credit always has been a cushion against
shocks like draught, ood etc. Credit is needed to smoothen out the
asymmetry between the ow of earnings and cyclisity of expenditure.
Each of the basic needs of health, education, food and social security,
apart from the working capital and long term investment requirements of
rural livelihood create a major demand for credit.
Before you do anything, stop and recall the face of poorest most helpless destitute person you
have seen and ask yourself, is that what I am about to do going to help him." - Mahatma Gandhi
Banking Sector Reforms 6
In a nutshell when India attained Independence in 1947 it inherited a
weak, desperate and unwieldy banking structure. Other than Imperial
Bank of India, there were many Indian Joint Stock Banks but they did not
have adequate capital and due to unhealthy business practises 205 banks
went out of business during 1947 to 1951.
The Banking Companies Act 1949 was amended 10 times between 1950
and 1967 trying to strengthen the banking system. As a result between
1960 and 1969 there were 48 compulsory mergers, 20 voluntary
amalgamations, 17 mergers with State Bank of India, 125 transfers of
assets and liabilities, all involving 210 banks. The number of banks which
was 567 in 1951 came down to 295 in 1961 and nally 91 in 1967.
The historic All India Rural Credit Survey carried out in 1954 showed that
formal credit institutions provided less than 9% of credit needs in India.
Money lenders, Traders and rich land lords handled more than 75% of
rural credit. Between 1950's and 1960's a way forward was possible
through co-operative societies. Their share in rural credit was less than
5%. But it rose to 20% in 1971.
Today India's co-operative structure has over 13 crore members including
6 crore borrowers and is one of the largest rural nancial systems in the
world. Around one lakh primary agriculture credit societies can be
regarded as the bed rock of India's rural economy. However the credit
societies have never attained the enormous potential opened up by their
vast outreach because of poor governance and political interference.
While they were originally supposed to be member driven, democratic,
self governing, self reliant institutions, Co-operatives have constantly
depended on Government for their basic functions. State Governments
have become the dominant share holders, Managers, Regulators,
Supervisors and Auditors. Savings and credit functions go together and
provide strength to the co-operatives all over the world which has been
missing in India. Dominance of richer people and rural elite continues in
these institutions even today.
In furtherance of the objectives of Regional and Functional spread of
Banking, the social orientation of commercial banking was conceived in
the founding law of Reserve Bank of India itself which, as a pioneering
provision, entrusted to it the responsibility of enlarging the supply of
agriculture nance through co-operative institutions or through scheduled
Banking Sector Reforms 7
commercial banks. On the basis of the recommendations of the Rural
banking enquiry committee (1950) for involving commercial banks in
rural credit, the then Imperial Bank of India agreed to open 114 ofces in
rural and semi urban areas (against 274 branches recommended) but could
open only 63 branches in 5 years from July 1951. It was therefore
thought that without the states intervention, banking facilities could
not be extended to such areas. Hence the Imperial Bank of India was
brought under Public ownership as State Bank of India from 1955
with the Central Bank (RBI) holding 92% of its shares with statutory
responsibility to establish atleast 400 additional branches within a 5
year period. It not only fullled the target but also went beyond the
targets. In September 1959, major state associated Banks of Princely
states were taken over and vested with the State Bank of India as
subsidiaries numbering 7. Still weaknesses of the Commercial Banking
system, such as poor population coverage of Bank branches, deposits and
credit, urban concentration, vast spectral credit gaps, excess control over
banks by Industrial and commercial houses, and unduly poor capital base
continued. This led to a re orientation of the Banking System. Between
1965 and 1969 social control over commercial banks was brought in by
the Government. They were
1. Introduction of the credit authorization scheme requiring banks to
obtain prior authorization for granting fresh credit limits of Rs.10
million or over to any single party so as to align credit policy more
closely with the ve year plan objectives.
2. The initiation of social control scheme in 1968 with the objectives of
achieving a wider spread of Bank Credit, preventing its misuse and
directing a larger volume of credit to priority sectors and
3. The statutory reconstitution of commercial bank boards with a
majority representation to informal sectors
This was done on the basis of the experiment in France, integrating
credit allocation with their system of indicative planning which
became a success. The decade 1955 to 1965 saw a series of steps
towards building a strong institutional structure for promoting medium
term and long term loans for industry and agriculture through public
sector. These include the nationalisation of insurance sector in April
1955, setting up of an Industrial Finance Dept within RBI in 1957,
administering a credit guarantee scheme for small scale industries in
July 1960 and promotion of many industrial credit institutions. In
1955, Industrial credit and Investment corporation of India was
established. In 1958, re-nance corporation was set up. In 1964,

Banking Sector Reforms 8

Industrial Development Bank of India and Unit Trust of India were
promoted. RBI also set up National Industrial Credit (Long term
operations) fund from the year 1964-65. In the sphere of agriculture
credit 2 funds were set up in 1955 called National Agricultural Credit
(Long terms operations) fund and National Agricultural Credit (
Stabilisation ) fund. From out of the prots of the RBI to support the
co-operative credit structure and the agriculture re nance and
development Corporation was set up in 1975.
The Socio political environment of 2 half of 1960s reected a sense of
disenchantment in the growing inequalities spawned by the development
process a sense which was highlighted by a series of studies such as the
reports of monopolies enquiry commission and Mahalanobis committee
on distribution of income and levels of living (1964). R.K. Hazari
submitted a detailed report to the planning commission in September
1967, wherein he stated so long as many of the major credit institutions,
are under direct control and/ or inuence of big industry and unless the
linked control of the industry and bank in the same hands is snapped, the
nationalisation of banks, reducing concentration of economic power with
a few was not possible.
Besides interlocking of inuence and interests which was a bane of the
banking system then, the actual operations of banks were characterized
by serious inadequacies. First, the coverage of the branch network was
unduly low compared with the size of the population - an average of one
branch ofce for 65,000 persons in the population, whereas the
developed-country norm was one branch per 8,000 population. Second,
the urban orientation of the banking system was blatantly obvious. At the
end of June 1969, there were just about 1,832 (or 22.2. per cent) out of
8,262 bank branches located in rural areas. Even this spread was achieved
because of the accelerated branch banking policy adopted by the State
Bank of India, which operated 629 branches in rural areas. Third,
concentration was excessive even in urban areas. As of April 1969, there
were 617 towns without any commercial bank branch, of which 444
towns were not served by any bank at all. The ve metropolitan cities of
Bombay(now Mumbai), Calcutta(now Kolkata), Delhi, Madras(now
Chennai) and Ahmedabad accounted for as much as 46 per cent of total
bank deposits and 65 per cent of total bank credit as at the end of 1967.
"Our principal problem will be how to eradicate poverty from our country. That will require
a radical reform of our land system, including the abolition of landlordism."
- Subhash Chandra Bose

Banking Sector Reforms 9

Fourth, the most disconcerting aspect of the banking structure was the
sectoral distribution of bank credit. The share of agriculture in total bank
advances in 1951 was 2.1 per cent; and even this gure had declined to
0.2 per cent by 1965-66. After the move to impose social control, it edged
up to 2.1 per cent in March 1967. In the case of industry, on the other
hand, its share off bank credit rose from 30.4 per cent in 1949 to 52.7 per
cent in 1961 and further to 62.7 per cent in March 1966. Fifth, the
nancial stake of the shareholders in banks was almost negligible. For
major banks, paid-up capital had constituted just about 1 per cent of total
bank deposits. Finally, professionalisation of the banking cadre and the
system of training for that left much to be desired resulting in a serious
shortage of trained, qualied and experienced professional managers.
Overall, an essential feature of the banking system appeared to be
nancial exclusion.
In many countries in Europe, banking development in the post-war years
was noteworthy in that it took account of the vital differences between
banking and other industries. Recognising the sensitive nature of the
banking industry, many countries with predominantly capitalist
economic structures thought it t either to nationalise their banks or to
subject them to rigorous surveillance and social control. France, Italy and
Sweden were typical examples in this respect.
Thus, the environment, motivation and rationale for the nationalisation of
banks existed and justied the action in 1969. The declared objectives of
nationalization were: (i) wider territorial and regional spread of the
branch network; (ii) better mobilisation of nancial savings through bank
deposits; (iii) re-orientation of credit deployment in favour of small and
disadvantaged classes all along the production spectrum; (iv) removal of
control by a few business houses (and that too with microscopic capital
stakes), (v) the conferring of a professional bent to bank managements,
and (vi) the provision of adequate training and reasonable terms of
service for bank staff. It bears stating that public ownership of banks
serves a number of overarching objectives. By subordinating the prot
motive to social objectives, it allows the system to exploit the potential
for cross subsidization, to direct credit to targeted sectors, despite
differential costs, and disadvantaged sections of society at differential
interest rates. This permitted the fashioning of a system of inclusive
nance that could substantially reduce nancial exclusion. And by giving
the state inuence over the process of nancial intermediation it allowed
the government to use the banking industry as a lever to advance the

Banking Sector Reforms 10

development effort. In particular, it allowed for the mobilization of
technical and scientic talent that could deliver both credit and technical
support to agriculture and the small scale industrial sector. This
multifaceted role of state-controlled banking was also conceived to be a
supply-leading one with emphasis on building a nancial structure in
anticipation of real sector activities, particularly in underdeveloped and
under-banked regions of the country.
In the circumstances, any attempt at signicantly altering the deployment
of commercial bank credit required purposeful action on three fronts: (i)
rigorous control over the pre-emption of credit by the medium and large-
scale industries and also by the private trade; (ii) positive policies and
instruments for directing credit in favour of the designated 'priority'
areas; and (iii) the development and maintenance of a sound framework
of instruments and institutions to full those objectives. The
nationalisation of banks was expected to vastly speed up branch
expansion; help mobilise deposit resources from all parts of the country
and from all sections of the people; meet diverse production needs
irrespective of size, assets and the social status of borrowers; create fresh
opportunities for backward areas; and nally, ensure that large borrowers
did not have more access to the resources of the banks than was actually
required for productive use and to prevent the use of credit for
speculative and other unproductive purposes.
Nationalisation A move forward
14 of India's largest scheduled commercial banks were nationalized in
1969. The RBI now acquired a more direct and activist role in deciding
banking policies with "a larger social purpose" and the need to "serve
national priorities and objectives such as rapid growth of agriculture,
small industries and exports, raising of employment levels,
encouragement of new entrepreneurs and development of backward
The 1961 Census showed that nearly 50 percent of India's towns and
almost none of our villages had bank branches. In 1969 not even 1
percent of India's villages were served-by commercial banks. While
industry accounted for a mere 15% of national income, its share in
commercial bank credit was nearly 67%. On the other hand, agriculture
that contributed 50% of GDP virtually got nothing from banks.

"It is but equity...that they who feed, clothe and lodge the whole body of the people, should have
such a share of the produce of their own labor as to be themselves tolerably well fed, clothed
and lodged."-Adam Smith, The Wealth of Nations, 1776

Banking Sector Reforms 11

Nationalization was aimed at redressing these inequities. Banks needed a
license from the RBI if they wanted to open a new branch. After
nationalization, branch expansion was deliberately directed towards
previously unbanked or under-banked rural and semi-urban areas. In
1980 6 more banks were nationalized.
Reaching out to Unbanked Areas
The RBI created a comprehensive list of unbanked locations in India that
it circulated every few years to all banks. In 1970, the RBI made its rst
"socially coercive" licensing policy. For every new branch in an already
banked area (with one or more branches), each bank would have to open
at least 3 branches in unbanked rural or semi-urban areas. In 1976
Regional Rural Banks (RRBs) were created. RRBs were set up to develop
the rural economy by providing "credit and other facilities, particularly to
small and marginal farmers, agricultural labourers, artisans and small
The number of rural branches of banks (including RRBs) increased from a
mere 1443 in 1969 to around 35,000 in the early 1990s. Most of this
increase was in unbanked areas. The number of banked locations rose in
this period from around a thousand to over 25,000. The share of rural
branches went up from 18 to 58 percent during the same period.
Another major impetus to rural credit was provided by the establishment
of the National Bank for Agriculture and Rural Development (NABARD)
in 1982. NABARD was set up as an apex Development Bank with a
mandate for facilitating credit ow for agriculture, rural industries and all
other related economic activities in rural areas
In order to ensure that rural deposits were not used to just increase urban
credit, the RBI directed that each rural and semi-urban bank branch had to
maintain a credit-deposit ratio of at least 60%. Between 1969 and 1987,
rural credit as a proportion of total credit went up from 3 to 15 percent.
Rural deposits as a share of total deposits went up from around 6 to over 15
percent. The credit- deposit ratio went up from under 40 percent in 1969 to
nearly 70 percent in 1984 and remained over 60 percent until the early
1990s. Now it has raised to 78% overall but rural credit is still low.
Priority Sector Lending
With a concern of credit not reaching to weaker and unreached sector, the
RBI came up with Priority Sector Lending

Every palace that one sees in India is a demonstration, not of her riches, but of the insolence
of power that riches give to the few, who owe them to the miserably requited labours of the
millions of the paupers of India. - Mahatma Gandhi

Banking Sector Reforms 12

Other than directing credit to hitherto unbanked geographical regions, the
RBI also tried to inuence the sector of bank lending. In 1972, certain
"priority" sectors were identied. These included agriculture and related
activities and small-scale and cottage industries. A target of 33% lending
to the priority sector was set in 1975. In 1979, the target was raised to 40%.
In 1980, sub-targets were set: 16% of lending was to go to agriculture and
10% had to be targeted to "weaker sections". The share of priority sector in
total credit of commercial banks went up from 14% in 1969 to around 40%
by the end of the 1980s. The share of agriculture had reached 19% by 1985
and remained around that gure until 1990. The number of agricultural
loan accounts increased from around 1 million in the early 1970s to nearly
30 million by the early 1990s. Within agriculture, 42% of the credit went
to small and marginal farmers.
Ceiling on Interest Rates
Perhaps the most important measure of social coercion used by the RBI
was to x ceilings for every size-class of loans for the various priority
sectors. The scheme for providing cheaper credit to weaker sections was
started in 1974. For this a ceiling of 4 percent interest per annum was
xed. Banks had to provide 1 % of their total loans within the priority
sector at this rate. In 1978, the RBI directed commercial banks and RRBs
to charge a at rate of 9% on all priority sector loans, irrespective of size.
Immediate payments were not to be mandatory for small rural borrowers.
It was clearly recognized that cost of credit, rather than access, was the
key constraint facing the rural poor. After all, the local moneylenders were
all over the place but the way they operated created more problems for the
vulnerable rural population.
Bank nationalisation and the associated public policies on banking and
nancial sector development were thus predicated on the strong
assumption of the need for promoting nancial intermediation by
building institutions, expanding their geographical spread, mobilising
savings, and ensuring a better regional, sectoral and functional reach of
institutional credit in India. Such a system of supply-driven institutional
development could neither be left to market forces nor to the initiative
In 1954, Pandit Jawaharlal Nehru had described public sector enterprises (PSEs) as 'temples
of modern India'. PSEs were conceived as instruments to bring socio-economic
transformation of the country. Those were the mainstay for self-reliant growth. Some
important objectives were to create infrastructure, absorb technology, encourage
innovation, generate employment and achieve certain social objectives.

Banking Sector Reforms 13

of private entrepreneurs. Also, the broad objectives of banking, as set
out above, were intertwined, for one could not be achieved without the
success of others. The functional reach of credit, for instance, could not be
attained without the geographical spread of banks as well as mobilisation
of local savings.
Even the ardent critics of India's growth strategy would admit that what
the country achieved in the area of nancial sector development before
the present reform process began, particularly after bank nationalisation,
was unparalleled in the nancial history of any other nation in the world.
The presence of nearly 62,000 Commercial bank branches in the country,
of which over 35,000 (or over 58 per cent as of March 1991) were in rural
areas, within a short span represented an unprecedented growth of
commercial banking in terms of both geographical spread and functional
reach. As on 31 March 2013, there were 102343 Bank branches of which
37953 (37%) were in rural areas, 27219 (26%) in semi urban areas, 19327
in Urban centres and 17844 in Metros. Still average Bank Br per one
Lakh population is only 10.4. Apart from commercial and co-operative
banking, the vast network of term- nancing, investment-and insurance
institutions promoted at the all-India, regional and state levels can only be
considered as novel, innovative and forward looking. The rapidity with
which and the diversied manner in which they grew, the condence,
stability and certainty that they imparted in savers' minds, and the societal
perspectives which guided their initial operations, were all made possible
because the banking and nancial system was primarily in the public
sector and not controlled by a few industrial houses and also not subject to
the vicissitudes of the market place. The system has, therefore, promoted
nancial intermediation of a high order and nurtured a vast army of
banking personnel, pushed up household saving in nancial assets,
extended vast investment and inventory credit to medium and large-scale
industries in the private and public sectors but without the industry-
banking interlocking that characterized the system earlier, promoted new
entrepreneurship, and also attained extensive credit reach to several
million borrowers hitherto neglected, especially in agriculture, small-
scale industry, small business and other informal sectors. The
development of varied institutions and instruments with vast
diversication of the money and capital markets have been the hallmark
of the post- nationalisation period.
Second, combined with the expansion of the bank branch network, steady
increases were recorded in the share of rural areas in aggregate deposits
and credit. From 6.3 per cent in December 1969, the rural deposit share
touched 15.5 per cent in March 1991 and the credit share rose from 3.3 per
Banking Sector Reforms 14
cent to 15.0 per cent. More signicantly, with the target credit-deposit
(C-D) ratio set at 60 per cent, the C-D ratios of rural branches had touched
64-65 per cent on the basis of sanctions. In fact, if migration of bank credit
from the place of sanction to the place of utilization is taken into account,
the C-D ratio for rural branches had ranged from 85 per cent to 97 per cent
by March 1991. As on 31 March 2013, the CD Ratio has reached 72.7%
of which Rural is still 59%, semi urban 51.8%, Urban 58.8% and Metro
84.9%. So the Deposits collected in Rural and Semi Urban areas are used
to nance the metro customers.
Third, three historically underbanked regions, also underdeveloped
economically, namely, north- eastern, eastern, and central regions, had
received special attention in the branch expansion programme of
scheduled commercial banks until the 1990s. These three regions
accounting for about 50 per cent of the country's population, had about 25
per cent of bank branches in 1969. By March 1992, their proportion of
bank branches had shot up to 42.6 per cent and the number from a total of
2,068 branches to 26,439. Alternatively, the proportion of bank ofces
located in relatively under-banked states or BIMARU states improved
during the period from 23.0 per cent to 34.0 per cent. This improvement is
also reected in a sizeable reduction in the average population covered
by each bank ofce in the under-banked and moderately-banked states.
Besides, it is in these backward states that the shift in the share of bank
branches in favour of 'rural' areas has been much more pronounced.
Another factor which is claimed in ofcial circles to have contributed to
an improvement in C-D ratios of regions and states has been the banks'
effort to supplement bank credit by investment in securities and bonds of
state governments and state-level institutions like electricity boards,
improvement trusts, local boards and others. This occurred to a greater
extent in underdeveloped states than in the relatively developed states.
Fourth, the improvement in banking development in the post-
nationalisation period was reected in a large number of districts sporting
noticeably higher growth in bank deposits, higher credit growth and
improved C-D ratios. A classication of all the districts in the country and
their rural branches by the size of their credit-deposit ratios conrms the
phenomenon of a growing number of districts in various regions having
experienced noticeable improvements in their ratios of credit to deposits
until the beginning of the 1990s. The number of districts enjoying C-D
ratios of 60 per cent and above shot up from 136 in March 1980 to 209 in
March 1985; thereafter it remained in the range of 163-177 until March
1992. Such improvement took place in rural centres of districts too.

Banking Sector Reforms 15

Fifth, sectorally a major achievement of the banking industry in the 1970s
and 1980s was a decisive shift in credit deployment in favour of the
agricultural sector in particular. From an extremely low level at the time
of bank nationalisation, the credit share of the sector had moved
to nearly 11 per cent in the mid-1970s and to a peak of about 18 per cent at
the end of the 1980s which was the ofcial target set.
Sixth, next to agriculture, the small-scale industrial sector occupies a
pivotal position in terms of employment and output share in the
economy. Apart from sectoral dispersal and wider promotion of
entrepreneurship, the small-scale industries have a regional dimension in
that the SSI units are scattered all over the country. Immediately after the
introduction of social control and subsequent bank nationatisation, banks
found the small-scale industries a lucrative target for lending. Hence the
share of SSI units in total bank credit shot up from 6.9 per cent in June
1968 to 12.0 per cent in June 1973. Thereafter, the share was sustained in
the range of 11 to 13.5 per cent until the early 1990s.
Finally, data on the trends in the number of borrowal accounts - overall
and small borrowal accounts - are reective of a similar positive trend.
Immediately after bank nationalisation and for the next two decades,
there occurred an upsurge in small borrowal accounts. Between
December 1972 and June 1983, there were 21.2 million additional bank
loan accounts nursed by the scheduled commercial banks, of which 19.8
million or 93.1 per cent were accounts with credit limits of Rs 10,000 or
less. This trend continued for another decade up to March 1992 (despite
the loan waiver scheme effective March 15, 1990).
With a view to taking account of the impact of ination, the cut-off limit
for small borrowal accounts in the RBI's reporting system was raised to
Rs 25,000 in December 1983. Between December 1983 and March 1992
when there were another 38.1million of additional total bank accounts,
the number of small borrowal accounts with credit limits of Rs 25,000 or
less increased by 36.0 million or almost 95 per cent of the total increase
This ability of the scheduled commercial banks to service small borrowal
accounts - a peak of over 62.5 million with credit limits of Rs 25,000 or
less from various sectors and regions of the economy, could be said to be
one of the outstanding achievements of bank nationalisation. It is this
aspect of banking development that aroused the aspirations of the
common man and gave him a sense of participation in the development
First bread and then religion . I do not believe in a God who cannot give me bread here, giving
me eternal bliss in heaven . Swami Vivekananda
Banking Sector Reforms 16
Economic Development Impacts
A study of 85 randomly selected districts shows that bank branch
expansion accelerated the pace of private investment in agriculture in the
1970s. A 10% increase in bank branches raised investment in animals and
pumpsets by 4-8%. Demand for fertiliser also went up with bank
Bank branch expansion into both banked and unbanked areas has a
signicant positive impact on the growth of non-agricultural output.
Expansion of banking into unbanked locations contributed
to the growth of the small business sector. This led to an increase in the
share of non-agricultural labour in the total workforce as also a rise in the
real wages of agricultural labour. Most signicantly, expansion of banks
into unbanked areas reduces aggregate poverty and the rural-urban
poverty difference. It is also found to reduce aggregate inequality in the
1991- Beginning of destruction in the name of reforms and after
Without analysing the benets of nationalisation which increased access
to banking, credit availability to the poor (though not adequate) and the
impact on development of the economy, the Government which started
the neo liberal economic policies asked RBI to set up a committee on the
nancial system called The Narasimham Committee I. The Narasimham
Committee placed its report centrally within the broader process of
"liberalisation" of the Indian economy. The Committee's
recommendations were inuenced by the policies of IMF and World
Bank. It took a clear view against using the credit system for social
objectives and argued that directed credit programs should be slowly
removed. It wanted the branch licensing policy to be changed and
regulation on interest rates removed. Future branch expansion was to
depend on "need, business potential and nancial viability of location". In
order that banks could compete globally, it wanted major changes that
were market-driven and based on protability. It also wanted a larger role
for private Indian and foreign banks. This was followed by Narasimham
Committee II, Raghuram Rajan Committee, Anwarul Hoda Committee,
Committee on nancial sector assessment, Kandhelwal Committee etc
whose recommendations revolved around some common issues such as:-
Government stake in Public Sector Banks to be brought down to 33%
and less without further delay.
Merger / acquisition of Public Sector Banks for "consolidation".
More liberal entry of the foreign banks in India.

Banking Sector Reforms 17

Share of FDI in Private Banks to be raised and bringing Nationalised
Banks under Companies Act.
Proportionate voting rights to the shareholders.
New banking licenses to industrial and corporate houses.
Phase out priority sector lending.
Huge outsourcing of Bank's jobs, though permanent and perennial in
Promote Asset Reconstruction companies.
Amendment of Banking Laws accordingly.
Reduction of staff strength sharply.
Banking Laws (Amendment) Act. 2012:
Within this policy frame work the Banking Laws (Amendment) Act 2012
has been introduced. This would facilitate - (i) merger of Public Sector
Banks, (ii) takeover of Indian Banks by foreign entities, (iii) dilution of
Government share holding through further issuance of share, (iv) provide
ample scope to the Private Shareholders to tighten grip over functioning
and policy decision of Public Sector Banks, (v) entry of new banks in
private sector.
Merger of Public Sector Banks:
As an integral part of nancial restructuring, merger of public sector
banks is the new target of the government. With the argument that to
enable Indian banks to compete in the global banking system they have to
have enormous size and strength and for that they propose that merger and
consolidation is the way out. We are apprehensive that such merger would
close many bank branches and reduce their staff. The close relation
between bank and its clients would be lost. The big banks would
essentially serve the elite customers and corporates. Given the craving of
the government for international capital the situation might lead to take
over of our banks by multinational mega banks.
Bank Licenses to Corporates:
Despite RBI's reservations the government has pressed the former to
initiate the process. The Standing Committee on Finance, under the
Chairmanship of Shri Yashwant Sinha has unambiguously opposed the
move as licensing the corporate may lead to misuse of bank's fund. Earlier
renowned economist Joseph Stiglitz and even the IMF had opposed
giving license to corporates, fearing it might lead to conict of interest and
defeat the very purpose of the course. The earlier record in this regard had
I think, the real problem in the nancial sector is issues of conict of interests. And when you have
corporate opening their won banks, you are opening a venue for conict of interests. Joseph Stiglitz

Banking Sector Reforms 18

been adverse. In 1993 around 11 private banks were given license. Most of
the banks - such as Global Trust Bank, Centurian Bank and Times Bank
had to close their shutters. The banks in India are mainly repository of
household savings. The corporates are main borrowers. Obviously, their
becoming owners of the banks could lead to misuse of funds. The United
Forum of Bank Unions has expressed its deep resentment against issuing
of licenses to corporate.
Before we go into the effects of these so called reforms, let us have a
look at what has happened in the global nancial system with focus on
the US nancial crises.
International Financial Crisis: The onset of nancial and market
globalization was considered to bring magical deliverance to the poor and
weak economies of the developing nations. This belief was aided and
abetted by the worldwide media campaign and the huge growth and
expansion of Information Technology. The focus and thrust of the
economy shifted from real sector to supercial speculative domain
that basically dealt in asset transfer and phoney transactions. The
easy availability of nance and credit, the spurt in consumerism, and mass
production and marketing of electronic gadgets, the unprecedented use of
advertisement and expansion of entertainment and leisure industry lent
credence to this belief. However, in quick succession came the realization
that the process has facilitated the market take-over by the international
nance and corporate houses who would share a part of their booties with
their local counterparts. The drive was piloted by the US and the
Washington based international institutions.
The national governments were made to acquiesce in and legalize the loot.
Right-wing economists and academics produced voluminous literature to
justify the shady process. State intervention in the economy was
desecrated. Free market became the mantra of the day.
The dubious process made atrocious transfer of wealth in the hands of
corporate and nancial magnets. Public money was plundered and offered
to private agencies. National economies were vandalized. Under the
monstrous pressure of the international nance capital, national
parliaments were bent to pass legislations curbing their own economic
The so called Meltdown was tailor made. The Sub-prime lending was
deliberately made. Since there was huge demand for housing, loans were
given to the parties without verication of identity and repaying capacity.
These loans were securitized and such securities were sold out to all and

Banking Sector Reforms 19

sundry. All the participants in these transactions, the mortgage companies,
the banks, the insuring agencies knew pretty well that the innate quality of
the products they were selling were worthless. What they did was to
distribute the risk worldwide. Thus the crisis was made global. The
governments and the central banks remained mute spectators to this
unholy arrangement. One of the prime factors behind this apocalypse
was serious disruption of banking norms and practices and reducing
the central banks to mere governmental tools in the United States and
Europe subsequently. This had resulted in collapse and bankruptcy of
most famed and largest banks, mortgage lending institutions and
insurance companies of the world. Along with them innumerable nancial
institutions were ruined. More than 400 banks have collapsed in US.
European Debt Crisis: The International Finance Crisis turned in late
2009 into a Sovereign Debt Crisis in Europe. Huge sums were provided by
various governments out of their public exchequer to bailout the
multinational banks and corporate houses. On the other hand they cut
down or withdrew the social welfare schemes and social security
measures which made peoples' lives more miserable and further reduced
the health and the growth of these economies. The European Debt crisis
was the result of economic recession, falling government revenues
coupled with corporate and bank bailouts by the state exchequer.
Sovereign Debt default became reality for certain countries and loomed
large for others. The World Economic Situation and Prospects 2012
released by the UN notes the growth slowdown of the world economy,
high unemployment and risk of another round of recession.
Discontents and Protests: The nancial and economic crises were
culminations of a long drawn process. The Europe continent was seething
with popular movements across the nations one after another since early
2000. It witnessed long and strong strike actions by the working class
against pension reforms in France, Germany, Italy and England during
2004-06. The French workers went on continuous strikes which could
only be compared with actions of British workers during 1984-85. In the
subsequent years, strike actions by the workers spread to Belgium,
Norway, Ireland, Greece and Spain.
In Greece two big confederations belonging to the private and public
sector jointly organized seven one-day general strikes in 2010. Portugal
also experienced two huge strike actions in 2010 by 3 million workers. In
Spain the confederations organized massive strike on September 29,
2010. Railway and Transport workers in Italy observed total strike. The
United States gave birth to a global movement namely 'Occupy Wall
Street' that immediately spread to Europe and other countries with the
Banking Sector Reforms 20
rousing slogan "they are just one percent, we are ninetynine". It originated
against the bank-bailouts, corporate-plunders and unchecked power of the
Wall Street and turned into a broad anti-capitalist, anti-exploitation
The whole of US and Europe have been witnesses to sporadic and
vigorous strikes and movements of workers against wage cuts,
retrenchment, and unfair practices of various authorities during these
years. The various governments have taken austerity measures to
compensate against the charity made to banks and corporates out of the
public funds. These austerity measures are actually meant for cutting the
benets and incomes of the workers. The workers have vigorously
resented the moves but in most of the places they have faced brutal
repression by the state, which did not hesitate to use repressive state
organs to break workers' resistance.
The governments of more than half of the European Union's 27
member states have fallen or been voted out of ofce. In most cases, a
direct line could be drawn between the government's exit and the so-
called austerity measures put in place because of the economic
situation. In fact, this has manifested the wrath of common people and
the working class against the pro-corporate policies of these ruling
classes and the regimes.
During the period there had been popular uprisings sweeping across the
Arab world which was undoubtedly a major breakthrough in the
otherwise politically impervious region. They were provoked by soaring
ination, joblessness and tyrannical rule. Within a short span rulers have
been forced out from power in Tunisia, Egypt and Yemen. Civil uprisings
had broken out in Bahrain and Syria. Major protests took place in Algeria,
Iraq, Jordan, Kuwait, Morocco and Sudan. The revolt and the movement
expressed explicitly the desire of the people for democracy and freedom.
Latin America: Towards a positive alternative: Opposite to the
imperialist economic policies pursued by the advanced economies of US
and Euro zone most of the Latin American countries have chosen a Leftist
path. They have deliberately and consciously rejected the US led
Liberalization and Globalization which promoted open market and
privatization. They have rejected the policy prescription given by the
IMF-WB-US Treasury Department, also known as the 'Washington
Consensus' and made a clean break with them. During the last decade
Venezuela, Chile, Brazil, Argentina, Dominican Republic, Uruguay,
Bolivia, Honduras, Nicaragua, Ecuador, Paraguay. EI Salvador and
Peru have chosen pro-people and democratic governments. Bolivia

Banking Sector Reforms 21

has nationalized its oil and gas reserves. Ecuador and Venezuela have
annulled their energy contracts with international oil-cartels. The
latter has also nationalized its banks. We hopefully look forward to the
onward march of Latin American people which might lead the
international working class movement to a positive direction.
It is surprising that the Governments which have been in power in our
country from 1991 to till date have not learned any lesson from the
International Financial Crises. Governments led by Congress under
UPA as well as led by BJP under NDA have followed almost similar
economic policies especially in the Banking sector. Whereas the
Congress led Government started the policy of liberalisation and
privatisation, BJP led Government introduced a separate ministry
for disinvestment of public sector. Now, let us have a look at the
consequences of Banking Sector reforms.
Neoliberal banking reform seeks to undermine these structural changes
and the concomitant role of the banking sector. There are a number of
policies that are geared towards this end. To start with, controls on interest
rates or rates of return charged or earned by banks have been diluted or
done away with. In practice, this never means that the range of interest
rates is completely "market determined". The central bank inuences or
administers that rate structure through adjustments of the bank or discount
rate at which it lends to the banking system and through its own open
market operations. The government also inuences interest rates by
altering administered interest rates offered on small savings and
pension/provident fund depositors.
While liberalization does not, therefore, fully "free" interest rates, it has
other kinds of consequences. It encourages competition between
similarly placed nancial rms aimed' at attracting depositors on the one
hand and enticing potential borrowers to take on debt on the other.
Competition in these spheres not only takes non-price forms, but leads to
price competition that squeezes spreads and forces rms to depend on
volumes to shore up their bottom line. That is, within the range implicitly
set by the central bank (and at times the government). Banks are
encouraged by liberalization of rates to accept lower spreads in the hope
of neutralising the effects on prots by attracting larger volumes of
The economy anarchy of capitalist society as it exists today is, in my opinion, the real source
of the evil Private Capital tends to be concentrated in few hands (resulting in) an
oligarchy of private capital, the enormous power of which cannot be dffectively checked
even by a democratically organised political society. Albert Einstein
Banking Sector Reforms 22
Second, there have been policy changes aimed at increasing the credit
creating capacity of banks and reducing the extent of pre-emption
through reductions in the Cash Reserve and Statutory Liquidity
Ratios, while offering them greater leeway in using the resulting
liquidity by altering priority sector lending targets.
Third, banking reform has sought to increase competition through
structural changes in the nancial sector. It has permitted a substantial
degree of "broadbanding" of nancial services, with development
nance institutions being allowed to set up mutual funds and
commercial banks, and banks themselves permitted to diversify their
activity into a host of related areas. The broad trend is towards a form
of universal banking, manifested in the reverse merger or merger of
development nance institutions with banks. The Reserve Bank of
India's Mid-Term Review of the Monetary and Credit Policy for 1999-
2000 declared: 'Though the DFls would continue to have a special role
in the Indian nancial System, until the debt market demonstrates
substantial improvements in terms of liquidity and depth, any OFI,
which wishes to do so, should have the option to transform into a bank
(which it can exercise), provided the prudential norms as applicable to
banks are fully satised."
Fourth, liberalisation removes or dilutes controls on the entry of new
private banks subject to their meeting pre-specied norms with regard
to capital investments. This aspect of liberalisation inevitably applies
to both domestic and foreign nancial rms, and caps on equity that
can be held by foreign investors in domestic nancial rms are
gradually raised and done away with. Easier conditions of entry do not
automatically increase competition in the-conventional sense, since
liberalisation also involves freedom to acquire nancial rms for
domestic and foreign players and extends to permissions provided to
foreign institutional investors, pension funds and hedge funds to
invest in equity and debt markets. This often triggers a process of
Further, the existing nationalised banks, including the State Bank of India,
were permitted to sell equity to the private sector and private investors
were permitted to enter the banking area. This applied to foreign banks as
well. These banks were given greater access to the domestic market, both
as subsidiaries and branches, subject to the maintenance of a minimum
assigned capital and being subject to the same rule as domestic banks.
The RBI has raised the cap on FDI in private sector banks from 20 to 49
and then to 74 per cent while retaining the cap at 20 per cent in the case of

Banking Sector Reforms 23

the public sector banks. The foreign ceiling on FDI applies to all forms of
acquisition of shares (IPOs or initial public offers, private placements
ADRS/GDRs and acquisition from existing shareholders). Foreign
branches having brand presence in India can also undertake direct
investments in private and public sector banks subject to approval from
the Reserve Bank of India (RBI). This provides the basis for an expansion
of the reach of existing foreign banks through equity-enabled tie-ups with
Indian entities. With the mushrooming of private banks promoted by
Indians in recent years and the more recent trend towards mergers of these
entities with larger strategic partners, the new policy sets the stage for an
expansion of foreign bank presence in India.
Fifth, to render the rivalry generated by this liberalisation of conditions
of entry and expansion effective in inuencing bank functioning,
banks have been provided with greater freedom in determining their
asset portfolios. Liberalisation involves a reduction in controls over
the investments that can be undertaken by nancial agents. Financial
agents are permitted to invest in areas they were not permitted to enter
earlier. Most regulated nancial systems sought to keep separate the
different segments of the nancial sector such as banking, merchant
banking the mutual fund business and insurance. Agents in one
segment were not permitted to invest in another for fear of conicts of
interest that could affect business practices adversely. There was also
the danger that savings parked in deposits and protected with deposit
insurance could be misused for speculative investments. Financial
liberalization involves the breaking down of the regulatory walls
separating these sectors, leading in the nal analysis to the emergence
of the so-called "universal banks" or nancial supermarkets. Banks
were permitted to cross the rewall that separated the banking sector
from the stock market and invest in equities, provide advance against
equity offered as collateral and proffer guarantees to the broking
community. Consequent ability of nancial agents to straddle
multiple nancial activities implies that the linkages between different
nancial markets tend to increase, increasing fragility and allowing
developments in anyone market to affect others to a far greater degree
than they did before. Today Banks are focusing on Cross selling
instead of their core business that is collecting deposits & lending it.
Finally, since nancial deregulation often results in practices that increase
volatility and may de-stabilize the nancial system, the government
specied new capital adequacy norms for the banks, prescribed guidelines
for accounting and for provisioning for bad debts and planned for the
expansion of the capital assets of banks. The norms prescribed by the

Banking Sector Reforms 24

Basel based International Banking principles should not be applied to
Public Sector Banks in India which are under the control of the Govt and
Effects of Banking Sector Reforms
The Banking Sector reforms have reversed the purpose of nationalisation
promoting privatisation, reducing credit to the poor and marginalised,
focus has shifted to class banking with major chunk of credits going to the
large borrowers and agriculture getting only a pittance. This has also
resulted in huge non performing assets and we are in the verge of a
nancial crises. If US had collateralised debts through toxic assets, we
have started transferring bad loans to asset reconstruction companies. If
US allowed mortgaging the same assets more than once, we are
converting bad assets through corporate debt restructuring into to
performing assets. The collapse seems to be inevitable unless the
government changes its policies and RBI comes out with viable solutions.
The great Bank Robbery Non Performing Assets
Bank robbery always makes big news. But, not when it is craftily
conducted by clever corporates. Corporate robbery of banks even
carries a fashionable nametag, 'non-performing asset'. It refers to
loans that have gone sour and are not recoverable. Banks simply write
them off. Unlike other categories of bank robbers who, if caught, face
prosecution under a host of sections and sub-sections of the Indian Penal
Code, big-time corporate bank robbers mostly go scot-free, although
several of them are even known to be habitual loan defaulters. (Think of
Vijay Mallaya who can buy a cricketer for Rs.13 cr and run formula I race
cars but will not repay loans to banks)
Banks, mostly in the public sector, have restructured or written off loans
worth over Rs. 3 lakh crore to favour large loan defaulters in less than the
last two years of the UPA regime. The scale and depth of the recent loan
write-offs and debt restructuring by banks have embarrassed even the
union nance minister, the Reserve Bank and Parliamentary standing
committee on nance. Thanks to judicial protection received by those
large corporate loan defaulters, stakeholders don't even get to know the
names of the concerned corporate promoters and their guarantors.
The rise of PSU bank NPAs, led by the State Bank of India, has been
phenomenal since the last nancial year, assuming almost scandalous

Thanks to judicial protection received by those large corporate loan defaulters,

stakeholders don't even learn the names of the concerned corporate promoters and
their guarantors
Banking Sector Reforms 25
proportions, seemingly vying with such mega scams as 2G and 'Coalgate'
in terms of amounts involved and the number of high-prole business
houses blowing up bank funds. According to CRISIL, a top rating agency,
banks' gross NPAs this scal may grow by Rs.1 trillion to Rs. 4 trillion in
March 2014. The amount is really big if compared with RBI's estimate of
gross bank NPAs since 2001 at Rs. 6 trillion. Data collected by RBI over
the last one year blew the lid off what goes as banks' loan classication.
Gross NPAs of PSU banks have risen from Rs. 71,080 crore as of March,
2011, to Rs. 1.55 lakh crore by the end of December 2012. The gross bank
NPAs was 3.3 per cent in March, 2013. It rose to 3.7 per cent by the end of
June. Crisil predicted it could grow to 4.4 per cent by March 2014, turning
almost Rs. 1 trillion worth bank credit as NPAs within such a short span.
Bulk of the NPAs was on account of only some 30 top loan defaulters,
stated by the Union Finance Minister P Chidambaram himself.
Admittedly, a key reason behind the sudden spurt in bank NPAs is the
economic slowdown. But, it would be nave to believe that banks and
large corporate borrowers did not notice the early warning. The personal
assets of the Corporate businessmen keep increasing only.
Yet, what is the government doing about it? Who are those 30 top loan
defaulters? What are their business proles? How could they access such
large sums of large bank funds, despite the risk factors linked with their
businesses in view of the current economic slowdown and their past loan
repayment records? And, who were their guarantors? These are some of
the questions long bugging stakeholders, including depositors and
ordinary shareholders. They would like to have some convincing answers
from those big NPA-hit banks or the government. Government banks are
bleeding. Taxpayers' money is being doled out to recapitalise these public
sector banks. The depositors and general public are in the dark. Even the
Parliamentary standing committee on nance had expressed concern over
the phenomenal rise in PSU banks' NPAs in less than 18 months.
Notably, the impression one gets from recent statements-to-strictures by
Finance Minister P Chidambaram, the former nancial services secretary,
Rajiv Takru, and the former RBI deputy governor K C Chakrabarty on the
alarming rise of PSU banks' NPAs caused mainly by some three dozen
large loan defaulters is that they are helpless about the way the public
funds are openly stolen or taken away by some smart corporate cookies.
Takru wants banks to 'act tough with willful defaulters.' Why are those
banks not paying heed to the top nance ministry bureaucrat? Could it be

Vijay Mallya's Kingsher owes Rs.2,673 crore is the largest defaulter of PSBs (except SBIs) while
Winsome Diamond and Jewellery Co with dues of Rs.2,660 crore is the second biggest defaulter.

Banking Sector Reforms 26

because of some high-level political interference? Who are they? It is
common knowledge that several of the top loan defaulters are builders and
real estate developers, all boasting top political connections in Delhi.
The former RBI deputy governor Chakrabarty's frustration over the
massive increase in bank NPAs is even more telling. At a recent bankers'
meet, he spoke about how banks sacriced over Rs. 1,00,000 crore by
writing off 'bad loans' to corporates which, he said, was much higher than
Finance Minister Chidambaram's farm loan waiver in 2008 before the
Lok Sabha polls that invited strong criticism by big industries and their
apex bodies. What is preventing Chakrabarty, himself a former chairman
of Punjab National Bank, from wielding his stick against the truant PSU
bank managements as a deputy governor of the country's central bank?
Why aren't the government and RBI naming the defaulters and attaching
all their assets along with their credit guarantors'?
Bad loans are being recast like never before to save large corporate
defaulters and banks themselves from public criticism in the name of
corporate debt restructuring (CDR), mostly with retrospective effect,
ignoring its impracticability and risk factors in many cases. CDR is often
misused to temporarily window-dress balance sheets by both banks and
loan defaulters.
According to a FICCI report, banks have cumulatively recast loans to the
tune of Rs 2.5 trillion under the CDR exercise, mostly during the last few
months. Last year, banks had restructured loans worth Rs. 75,000
crore, almost double the 2011-12 gure. Bankers privately fear that a
good chunk could turn unproductive. The CDR provides relief to
companies which are unable to repay existing loans by extending the
payback period, reducing or partly waiving the interest rate, giving a
repayment holiday and the option to convert a part of loan into equity.
During last April-June alone, PSU banks had restructured loans of some
one dozen companies for a total amount of Rs. 20,000 crore.
How many of the PSU banks do proper diligence before sanctioning credit
and how fewer of them approve CDR on merit? By the RBI deputy
governor's own admission, a majority of the write-offs involve big
accounts, underscoring the need to hold top executives who clear the big
loan proposals, accountable for its decisions. Wrong appraisal is leading
to diversions, leading to over- leverage, leading to fraud, leading to
NPAsthey are all inter-related, he said. Large bank NPAs in the last
two years, the huge loan write-offs and the sudden spate of CDRs before
the Lok Sabha election are far worse than occasional bank robbery. They
rob depositors and shareholders of better returns and the
government of tax revenue to shield large corporates who have been
Banking Sector Reforms 27
traditionally running away with bank funds, turning companies sick
and throwing workers out of jobs, all seemingly with the consent and
connivance of bank managements.
Kingsher Airlines is biggest defaulter of public sector banks.
According to the All India Bank Employees Association, Kingsher tops
the list of 50 biggest defaulters of PSBs that owes Rs40,528 crore. In order
to highlight the increasing bad loans or non-performing assets (NPAs)
menace in PSBs, the bank employees are observed 5th December 2013 as
'All India Demands Day' by wearing badges and holding rallies.
According to AIBEA, Mumbai-based Winsome Diamond and Jewellery
Company (erstwhile Su-Raj Diamond India Ltd), with dues of Rs2,660
crore, is the second highest defaulter, followed by Electrotherm India Ltd
at Rs2,211 crore.
In May 2013, ratings agency CRISIL downgraded the Jatin R Mehta-led
Winsome Diamond to a 'D' rating while placing it under watch in view of
continuous defaults of the company's overseas customers and consequent
development of letters of credit (LoCs). At that time, Punjab National
Bank, the lead bank of the consortium, had an exposure of more than
Rs1,800 crore to the Winsome Group.
Some of the other big-ticket defaulters include, Zoom Developers Pvt Ltd
(Rs1,810 crore), Sterling Biotech Ltd (Rs1,732 crore), S Kumars
Nationwide Ltd (Rs1,692 crore), Surya Vinayak Industries Ltd (Rs1,446
crore), Corporate Ispat Alloys Ltd (Rs1,360 crore), Forever Precious
Jewellery and Diamonds (Rs1,254 crore), Sterling Oil Resources Ltd
(Rs1,197 crore) and Varun Industries Ltd (Rs.1,129 crore)

Banking Sector Reforms 28

Rupees in crores)

1. Kingsher Airlines 2673

2. Winsome Diamond & Jewellery Co. Ltd. 2660
3. Electrotherm India Limited 2211
4. Zoom Developers Private Limited 1810
5. Sterling Bio Tech Limited 1732
6. S. Kumars Nationwide Limited 1692
7. Surya Vinayak Industries Ltd. 1446
8. Corporate Ispat Alloys Limited 1360
9. Forever Precious Jewellery & Diamonds 1254
10. Sterling Oil Resources Ltd. 1197
11. Varun Industries Limited 1129
12. Orchid Chemicals & Pharmaceutical Ltd. 938
13. Kemrock Industries & Exports Ltd. 929
14. Murli Industries & Exports Limited 884
15. National Agricultural Co-Operative 862
16. STCL Limited 860
17. Surya Pharma Pvt. Ltd. 726
18. Zylog Systems (India) Limited 715
19. Pixion Media Pvt. Limited 712
20. Deccan Chronicle Holdings Limited 700
21. K.S. Oil Resources Ltd. 678
22. ICSA (India) Ltd. 646
23. Indian Technomac Co. Ltd. 629
24. Century Communication Limited 624
25. Moser Baer India Ltd. & Group Companies 581

Banking Sector Reforms 29

26. PSL Limited 577
27. ICSA India Limited 545
28. Lanco Hoskote Highway Limited 533
29. Housing Development & Infra Ltd. 526
30. Mbs Jewellers Pvt. Ltd. 524
31. European Projects And Aviation Ltd. 510
32. Leo Meridian Infra Projects 488
33. Pearl Studios Pvt. Ltd. 483
34. Educomp Infrastructure & School Man 477
35. Jain Infraprojects Limited 472
36. Kmp Expressway Limited 461
37. Pradip Overseas Limited 437
38. Rajat Pharma/ Rajat Group 434
39. Bengal India Global Infrastructure Ltd. 428
40. Sterling Sez & Infrastructure Pvt. Ltd. 408
41. Shah Alloyes Ltd. 408
42. Shiv Vani Oil And Gas Exploration Limited 406
43. Andhra Pradesh Rajiv Swagruha Corp. Ltd. 385
44. Progressive Constructions Ltd 351
45. Delhi Airport Met Ex Ltd. 346
46. Gwalior Jhansi Expressway Limited 346
47. Alps Industries Limited 338
48. Sterling Port Limited 334
49. Abhijeet Ferrotech Limited 333
50. Sujana Universal Industries 330

Banking Sector Reforms 30

In view of the rising bad loans in state-owned banks, the AIBEA said the
government should set up a special investigation team to probe the
decisions of their credit appraisal committees in cases where borrowers
have turned wilful defaulters.
In addition, the bank employees associations also want responsibility
xed on banks' top brass for the loans that have turned bad, allow banks to
share information on NPAs and wilful defaulters under the Right to
Information (RTI) Act, and declare wilful loan default as a criminal
According to the Union, over the past seven years, there are fresh bad
loans worth Rs4.95 lakh crore only in PSBs, while during the same period,
these lenders wrote off bad debts worth Rs1.4 lakh crore. Top four
defaulters of state-run banks constitute Rs23,000 crore of NPAs.
There are 7295 names in which about Rs 68,000 crore loans are
involved Rs 1 crore and above. That has to be published. Incentives are
being given for corporate delinquents. In fact, about 3.25 lakh crore of
which about Rs 2.70 lakh crore of bad loans are being restructured as good
loans, as performing loans. These are all pertaining to the corporate
people. Restructured loans / CDR accounts are nothing but hidden NPAs.
It's a volcano. Anytime the bomb can blast."
The Unions have demanded PSBs to publish list of bank loan defaulters of
Rs1 crore and above, make wilful default in bank loan a criminal offence,
order investigation to probe nexus and collusion (between the borrower
and ofcials), amend Recovery Law to speed up the process, take
stringent measures for recovering bad debts and not to incentivise
corporate delinquency.
Associations are now demanding that banks publish the list of defaulters
of Rs 1 crore and above and classify wilful default as criminal offenders.
Currently, RBI collates the data of wilful defaulters for improving bank
supervision. Finance Ministry and RBI have been concerned about the
way promoters renege on their loan repayments. They had asked banks to
go after wilful defaulters aggressively and even look at management
takeover as part of the recovery process. But nothing has happened.

Banking Sector Reforms 31

Write-Offs of NPA during the scal year ended (Rs. In Crores )

Courtesy : AIBEA

Trends in NPA
Slowdown of the economy, hardening of lending rates, rising ination,
dwindling asset prises, global economic situation and wilful default are
the major causes of increasing NPA.
SSIs, Personal Loans, Infrastructure Loans and Loans to power sector
contribute to the growing NPA. As already stated Corporate Sector is the
major villain. Priority Sector including Agriculture recovery percentage
is comparatively better.
If the Government does not take efforts to recover corporate debts it
may lead to collapse of many banks. Lessons have to be learnt from
the United Bank of India crises. The Government should pay to the
banks the loans outstanding in infrastructure and power sector which
were given due to the directions of the Government. The
Government also should come heavily on the large borrowers with
outstanding more than Rs.1 cr whose number is less than 10,000 but
the loan outstanding is so huge. The personal assets of the major
share holders have to be taken over and the Government may have to
nationalize many of these companies and take control of them.

The Impact of the reforms on rural debt

All India Rural Debt and Investment Survey 1971-72 to 2001-02

Banking Sector Reforms 32

At the outset, it may be mentioned that the Survey results of 26th round
(1971-72), 37th round (1981-82), 48th round (1991-92) and 59th round
(2002-03) of AIDIS are comparable across Agency-wise and State-wise
over the period. In order to compare the progress of formal and informal
nance after the bank nationalization and to provide an overview of the
ow of credit to rural areas in terms of credit agency-wise, we have
analyzed these Survey results in a comparative manner and State-wise
separately. It is important to note that there are problems in using data
from these surveys given the sharp reduction in sample size of households
and villages, especially in the 37th round in 1981-82. It may further be
mentioned that, the estimates of household debt starting from 48th round
in 1991-92 are based on both cash and kind, whereas before that it was
based on cash debt. From Table 1, it can be assessed that the
informal/non-institutional nance was gradually declining during the
1960s, was very nearly broken during the 1970s, with the institutional
agencies making steady inroads into the rural scene. The share of
institutional credit agencies in the outstanding cash dues of the rural
households at the all-India level increased from 29 per cent in 1971 to 61
per cent in 1981 and then the pace of increase was arrested rising to 64 per
cent in 1991. During the following decade, the share declined by about 7
percentage points and reached 57 per cent in 2002. It seems that credit
cooperatives, commercial banks, and other formal nancial sector
programs in rural areas have not displaced informal sources of credit,
altogether. The 2002 AIDIS survey revealed that 43 per cent of rural
households continue to rely on informal nance, which includes
professional moneylenders, agricultural moneylenders, traders, relatives
and friends, and others.
Institutional agencies (All-India Level)
It can be observed that, the most remarkable performance was that of the
commercial banks while the share of co-operative societies in the
outstanding cash dues of cultivator households increased from 20.1 per
cent in 1971 to 28.6 per cent in 1981, thereafter dropping to 27.3 per cent
in 2002, that of commercial banks rose to 29 per cent in 1991, after rising
sharply to 28 per cent in 1981 from a meager 2 per cent in 1971. It appears
that the large number of branches that was set up by various commercial
banks in 1970s and the subsequent introduction of rural banking schemes
have driven the commercial banks to assume the role of principal credit
agency in rural areas. It may be of interest to note that the share of
government departments in the outstanding cash dues of cultivator
households, after showing a decline from 7 per cent in 1971 to 4 per cent in
1981, again rose to 6 per cent in 1991 and dropped to 2 per cent in 2002. As

Banking Sector Reforms 33

a whole, at the all India level, among the institutional credit agencies, the
co-operative societies and the commercial banks were the two most
important agencies in the rural sector. These two agencies together, shared
91 per cent of the entire amount of debt advanced by the institutional
agencies, accounted for 52 per cent of the outstanding cash debt, with co-
operative societies (27.3 per cent) accounting for a greater share than the
Commercial Banks (24.5 per cent) in 2002.
The gradual increase in the share of formal institutional credit in
agriculture witnessed some reversal during 1991-2002 mainly because of
a pull back by commercial banks. This disquieting trend is, in part, due to a
contraction in rural branch network in the 1990s, and in part due to the
general rigidities in procedures and systems of institutional sources of
credit (Subbarao, 2012).
Non- Institutional agencies (All-India Level)
The combined share of all the non-institutional credit agencies in the
outstanding cash dues of cultivator households recorded a sharp decline of
32 percentage points during 1970s but the decline got arrested in the
1980s the fall being just of about 3 percentage points but increased to 43
per cent subsequently. The decline is found to be the steepest for the credit
agency 'agricultural money lenders', whose share came down to 6 per cent
in 1991 from about 9 per cent in 1981 and 23 per cent in 1971. However,
the share of 'professional money lenders' has reported a rise to about 9 per
cent in 1991, after registering a fall to 8 per cent in 1981 from about 14 per
cent in 1971. Subsequently, the share has jumped to about 20 per cent in
2002. Relatives and friends appear to be gradually losing their importance
as a source of credit. From 14 per cent in 1971, their share fell to 9 per cent
in 1981, and dipped further down to about 7 per cent subsequently. As a
whole, among the non-institutional agencies, professional money lenders
were the main source of credit. Among thenon-institutional credit
agencies, money lenders both professional and agricultural in that
order were found to be important sources of nance in rural areas, their
respective shares being 19.6 per cent and 10.0 per cent. The share of
relatives and friends was 7 per cent of the cash dues of rural households.
State-level Changes during 1971 to 2002
The State-level estimate indicates that of the total outstanding cash dues,
the share of institutional agencies had increased marginally during the
1980s in most of the states, after having increased substantially during the
1970s (Table 2). However, the role of the institutional agencies, as judged
from their share in the outstanding cash dues, varied from state to state. A
snapshot of this variation in 2002 shows that in the rural areas,
institutional credit agencies accounted for 85 per cent in Maharashtra,

Banking Sector Reforms 34

followed by Kerala (81 per cent), Himachal Pradesh and Orissa (74 per
cent each) and Jammu & Kashmir (73 per cent). In contrast, not even 50
per cent of the debt was contracted through the institutional credit
agencies in the rural areas of Andhra Pradesh (27 per cent), Rajasthan (34
per cent), Bihar (37 per cent) and Tamil Nadu (47 per cent).

Table 2: Share of Institutional and Non-Institutional Agencies in

Outstanding Cash Debt of Major States in Rural Areas
(Per cent)
Institutional Non-Institutional
Major States
1971 1981 1991 2002 1971 1981 1991 2002
(26th) (37th) (48th) (59th) (26th) (37th) (48th) (59th)
Andhra Pradesh 14 41 34 27 86 59 66 73
Assam 35 31 66 58 65 69 34 42
Bihar 11 47 73 37 89 53 27 63
Gujarat 47 70 75 67 53 30 25 33
Haryana 26 76 73 50 74 24 27 50
Himachal Pradesh 24 75 62 74 76 25 38 26
Jammu & Kashmir 20 44 76 73 80 56 24 27
Karnataka 30 78 78 67 70 22 22 33
Kerala 44 79 92 81 56 21 8 19
Madhya Pradesh 32 66 73 59 68 34 27 41
Maharashtra 67 86 82 85 33 14 18 15
Orissa 30 81 80 74 70 19 20 26
Punjab 36 74 79 56 64 26 21 44
Rajasthan 9 41 40 34 91 59 60 66
Tamil Nadu 22 44 58 47 78 56 42 53
Uttar Pradesh 23 55 69 56 77 45 31 44
West Bengal 31 66 82 68 69 34 18 32
All India 29 61 64 57 71 39 36 43
All India Debt and Investment Survey, NSS 59th Round, Report No. 501.

Banking Sector Reforms 35

During the periods 1971 to 2002, the states do not reveal any uniform
pattern in the share of institutional agencies in total debt. Compared to
1991, the picture had changed in some of the major states (Table 2). Of the
20 major states in the rural, as many as 15 have shown a fall in the share of
institutional agencies, notable among them are Bihar, Punjab, Haryana
and West Bengal, where the fall in percentage share from 1991 values had
been to the tune of 36, 23, 23 and 14 percentage points, respectively. On
the other hand, 13 major states out of 21 had registered a rise in the share,
which, barring a few with marginal to moderate rise, can be described as
sharp to spectacular.
Recent Reports on 'Informal Credit Related Issues'
In the absence of survey data beyond AIDIS 2002 (published in December
2005), we have heavily drawn upon three recent Reports (RBI, 2006;
GOI, 2010; RBI, 2011) that were also based on the sample surveys and
extended the AIDIS data. The Report of the Task Force on 'Credit Related
Issues of Farmers' (Chairman: Shri U. C. Sarangi), submitted to the
Ministry of Agriculture, Government of India, looked into the issue of a
large number of farmers who had taken loans from private moneylenders,
but not covered under the 'Agricultural Debt Waiver and Debt Relief
Scheme' of 2008. The Task Force Report has observed that more
disquieting feature of the trend was the increase in the share of
moneylenders in the total debt of cultivators. There was an inverse
relationship between land-size and the share of debt from informal
sources. Moreover, a considerable proportion of the debt from informal
sources was incurred at a fairly high rate of interest. About 36 per cent of
the debt of farmers from informal sources had interest ranging from 20 to
25 per cent. Another 38 per cent of loans had been borrowed at an even
higher rate of 30 per cent and above, indicating the excessive interest
burden of such debt on small and marginal farmers. The continued
dependence of small and marginal farmers on informal sources of credit
such as private moneylenders was attributed to constraint in the rural
banking network and services arising out of nancial sector reforms.
Rigid procedures and systems of formal sources preventing easy access
by small and marginal farmers, vied with the easy and more exible
methods of lending adopted by informal sources. The Task Force
members came across situations where farmers were borrowing at the rate
of ve to ten per cent per month.
The identication of farmers indebted to private moneylenders is difcult.
Such loans in most cases have no formal records and identifying and
authenticating the debt from moneylenders may lead to problems of moral
hazard (GOI, 2010). According to the Report, credit needs of small and
Banking Sector Reforms 36
marginal farmers are not only growing but are getting diversied due to
increasing commercialization and modernization of agriculture.
Simultaneously, for a variety of other needs, farmers incur considerable
expenditure, resulting in increased borrowings. Adequacy, timeliness,
affordability and convenience are factors that inuence farmers, and for
that matter, all borrowers, in their choice of creditors. Given that a single
source may not to be able to satisfy all their credit needs, many farmers
approach both formal and informal sources. Invariably, those who cannot
afford any collateral are forced to borrow from informal sources. The Task
Force reviewed the debt swap schemes of banks and revealed that these
schemes had limited success as farmers were reluctant to disclose the
name of the money-lenders, apprehensive in disclosing debt and some had
even repaid the existing debt out of their Kisan Credit Card limits. Even
though the Task Force came across some good debt swap schemes,
bankers reported difculty in taking these to scale and also reported that
there was little guarantee that farmers would not ever again borrow from
Based on a review of the existing laws on money lending in the country,
the 'Technical Group to Review Legislation on Money Lending' (RBI,
2006) has observed: in spite of there being a legislation, a large
number of moneylenders continue to operate without license, and even the
registered moneylenders charge interest rates much higher than
permitted by the legislation, apart from not complying with other
provisions of the legislation. Signs of effective enforcement are absent.
The Report recommended legislative reforms to streamline the activities
of moneylenders through suitable mechanism of incentives and
disincentives. In this regard, Jeromi (2007) attempted to analyse the
working of moneylenders in Kerala based on a sample survey, and
mentioned that the existing legal provisions and regulatory and
supervisory mechanisms are inadequate to protect the interests of both
depositors and creditors in rural Kerala. The growing commercialisation
of Indian agriculture has encouraged the rise of trader-moneylender, as
the formal sector nance is inadequate to meet the growing credit
requirements of agriculture. The Task Force (GOI, 2010) noted that the
moneylender today comes in many forms as an outright lender, as a
supplier of inputs/consumer goods, as a for-prot non-banking nance
companies (NBFCs) including the for-prot MFIs, as a buyer of produce,
and as an owner of the land on which the farmer is dependent. The sheer
numbers of moneylenders, easy access to them, and their intricate
relationships with the borrowers coupled with limited access to formal
institutions made it difcult for borrowers to complain against them.

Banking Sector Reforms 37

India, which has a rich tradition of cooperative spanning over a century,
has embarked upon a path of giving lot of llip and incentives to private
micro-nance institutions which have of late been mushrooming
throughout the length and breadth of the country. This has
been done at the dictates of World Bank which has found a wonderful
vehicle to purvey micro-nance, and thereby to channel nance capital to
the rural areas, fast replacing cooperatives and the principles, and ethos
behind them. Though initially, the experiment for micro-
nance began with a lot of positive note with NABARD drawing the rst
experimental SHG- Bank linkage programme in 1992, the sector, since
the beginning of full-blown neo-liberal economy in early 2000, has been
fast replacing the SHG-Bank linkage programme with private MFI-Bank
linkage programme. This dominance by private sector nancial sharks
has totally vitiated the culture of micro-nance with exorbitant interest
rates breaking the back of poor farmers, especially women, who, in many
states like Andhra Pradesh, Tamil Nadu, Orissa, Maharashtra, West
Bengal, and Karnataka are forced to commit suicides unable
to bear the burden of loan and interest. The data furnished by NABARD
for the period 2006- 07 to 2009-10 show that there was a huge rise in both
annual disbursements of bank credit and total outstanding against MFI
during this period. For example, the total loans disbursed
to MFls from Banks showed an increase from Rs. 1153 crore in 2006 07 to
Rs. 8063 crore in 2009-10, thereby registering a growth rate of 71 %,90%
and 116% in the years 2007-08, 2008-09 and 2009-10 respectively over
the previous years. However, the Bank loans disbursed to SHGs showed
an increase from Rs. 7981 crore in 2006-07 to Rs. 14453 crore in 2009-10,
registering an increase of 11 %, 38% and 18% in 2007-08, 2008-09 and
2009- 10 respectively over the previous years. In several states like West
Bengal, Maharashtra the share of MFls in total bank credit disbursed
behind micro-nance has overtaken that of SHGs. In 2010, in West
Bengal, such share of MFls has become 54.41 % against 45.59% in case of
SHGs, whereas in Maharashtra, such share of MFls became 63% against
36.6% for SHGs. At the All India plane, MFls had 42% of such share of
bank credit behind micro-nance against 57% for SHGs in 2010. (Ref.
"Financing of Indian Micronance", Tara S Nair, EPW, June
Though, there were immense possibilities to harness the potential of
SHG-Bank linkage programme through the intermediation of
cooperatives as being attempted during the regime of previous Left Front
Government in West Bengal and Kerala's highly successful

Banking Sector Reforms 38

"Kudumbashree" model of micro nance which effectively integrates the
grass-root planning process, decentralization of democracy, procurement
of food crop from farmers through SHGs, running of successful PDS
thereby contributing to food security, such model of peoples' cooperation
was anathema to votaries of global nance capital. NABARD should
reorient its focus to SHG-Bank Linkage programme especially in the
backward regions of our country.
Micronance sector in India has progressed remarkably since 1990s and
this sector has been acting as an important ally in expandingnancial
inclusion in rural areas (NABARD, 2012). Reserve Bank provides
guidelines to banks for mainstreaming micro-credit providers,inter alia,
stipulated that micro-credit extended by banks to individual borrowers
directly or through any intermediary would be reckoned as part of their
priority sector lending. However, no particular model was prescribed for
micro-nance and banks have been extended freedom to formulate their
own models or choose any conduit/intermediary for extending micro-
credit. Though, there are different models for micronance provision, the
self-help-group (SHG)-Bank Linkage Programme has emerged as the
major micronance program in the country. It is being implemented by
commercial banks, regional rural banks (RRBs) and cooperative banks.
The gathering momentum in the micronance sector has brought into
focus the issue of regulating the sector.
The Malegam Committee Report (RBI, 2011) was constituted to study
issues and concerns in the MFI sector in the wake of Andhra Pradesh
micro nance crisis in 2010. The Committee, inter alia, recommended (i)
creation of a separate category of NBFC-MFIs; (ii) a margin cap and an
interest rate cap on individual loans; (iii) transparency in interest charges;
(iv) lending by not more than two MFIs to individual borrowers; (v)
creation of one or more credit information bureaus; (vi) establishment of a
proper system of grievance redressal procedure by MFIs; (vii) creation of
one or more social capital funds; and (viii) continuation of
categorisation of bank loans to MFIs, complying with the regulation laid
down for NBFC-MFIs, under the priority sector. The recommendations of
the Committee were discussed with all stakeholders, including the
Government of India, select State Governments, major NBFCs working
as MFIs, industry associations of MFIs working in the country, other
smaller MFIs, and major banks. The Reserve Bank has accepted the broad
framework of regulations recommended by the Committee Report.
The Micro Finance Institutions (Development and Regulation) Bill, 2012
envisages that the Reserve Bank would be the overall regulator of the MFI
sector, regardless of legal structure. The Reserve Bank has provided the
Banking Sector Reforms 39
views on the Bill to the Government of India. The aims of the Bill are to
regulate the sector in the customers' interest and to avoid a multitude of
micronance legislation in different states. The proper balancing of the
resources at the Reserve Bank to supervise these additional sets of
institutions besides the existing regulated institutions could be an
important issue. Requiring all MFIs to register is a critical and necessary
step towards effective regulation. The proposal for appointment of an
Ombudsman will boost the banking industry's own efforts to handle
grievances better. Compulsory registration of the MFIs would bring the
erstwhile money-lenders into the fold of organised nancial services in
the hinterland who had been acting as MFIs hitherto. The Bill requires
wider discussion and the Standing Committee has prevented it from
presented in the Parliament.
As reported in Malegam Committee Report, the impact of micronance
on the lives of the poor is inconclusive. The micro surveys create fears that
in some cases micronance has created credit dependency and cyclical
debt. The analysts expressed doubt as to whether lending agencies have in
all cases remained committed to the goal of ghting poverty or whether
they are solely motivated by nancial gain. This augurs well for the
regulation of micronance as a tool of nancial inclusion and greater well
being of the society.
Informal credit has certainly declined as a percentage of total debt, and
both professional and agricultural moneylenders have reduced their share
over time. Informal/non-institutional nance was gradually declining
during the 1960s and was nearly broken during the 1970s with the
institutional agencies venturing into the rural areas with Nationalization
of major commercial banks and setting up of Regional Rural Banks with
initiatives of the Reserve Bank. The decline in the share of moneylenders
reects in part the Government's efforts to register and regulate
professional moneylenders.
At the all India level, among the institutional credit agencies, the co-
operative societies and the commercial banks were the two most
important agencies in the rural sector. These two agencies together shared
91 per cent of the entire amount of debt advanced by the institutional
agencies, accounted for 52 per cent of the outstanding cash debt, with co-
operative societies (27.3 per cent) accounting for a greater share than the
Banks (24.5 per cent). Of the 20 major states in 2002, as many as 15 have
shown a fall in the share of institutional agencies, notable among them are
Bihar, Punjab, Haryana and West Bengal. The above facts indicate that the
cooperatives, commercial banks, and other formal nancial sector
programs in rural areas have not displaced informal sources of credit
Banking Sector Reforms 40
altogether as 43 per cent of rural households continue to rely on informal
nance in 2002.
The most important reason for continuation of informal rural credit
market is that the existing nancial institutions tend to restrict their
lending activities to more risky eld of lending to the agricultural sector.
Those in the rural credit market prefer to use informal sources of credit
despite the fact that the interest rates are much higher. Informal sources do
not insist on punctual repayment as banks or cooperative societies do.
Usually, it is possible to obtain loans for such purposes as marriage. There
are generally no intricate and complicated rules governing the granting of
loans by the village moneylenders. And informal sources are willing to
lend money more freely without collateral and on the borrower's mere
promise to repay.
The Credit Deposit Ratio in the North Eastern Region came down to
29.8% in 2004 from 54.9% in 1990. In the Southern Region it came down
to 68.1% in 2004 from 82.1% in 1990. Lending to priority sector was
18.2% in 1969 which increased to 45.3% in 1987 but has reduced to
25.8% in 2004.
Agricultural credit which was 10.7% in 1975 incrased to 17.7% in 1987
but has come down to 10.8% in 2005.
Agriculture Loans of Rs.25000 and less was 49.1% in 1985 came down to
23% in 2005.
In 1980-81, 51.7% of agriculture loans went to Marginal farmers (upto 2.5
Acres) but in 2001-02 it has come down to 38.4%.
As per RBI Reports, as on 2010 top 100 centres contribute 69.4% of
Deposits and 78% of credit.
The credit deposit Ratio is 84.9% for Metros, 58.8% for ubran, 51.8% for
semiurban and 59% for Rural.
Regional Rural Banks:
Regional Rural Banks have registered substantial progress in terms of,
deposit mobilization, credit extension and prot earnings. The 64 RRBs
having a branch network of 17,856 could mobilize a deposit of Rs.2,
11,458 crores as on 31 st March 2013 and recorded a net prot of Rs. 2385
crores during the same period. More notably the credit-deposit ratio,
which was 57.1 % in 2009-10, increased to 59.69% in 2010-11,62% in
2011-12 and reached 66.13% by the end of March 2013. The presence of
RRBs in the context of nancial inclusion is indispensable. The
employees and ofcers of the Banks have been demanding since long for
the establishment of National Rural Bank of India as the Apex Body or

Banking Sector Reforms 41

merger of these Banks with Sponsor Banks. However, this has not been
acceded to by the Government of India. Instead, the Government has
come out with a proposal of privatization of RRBs by virtue of the RRB
Act Amendment Bill 2013. Should the amendments be carried out, it
would certainly dilute the existing share holding pattern (presently,
Central Government 50%, Sponsor Bank 35% and State Government
15%) and open up avenues for Private and Corporate Sector as well as
NGOs to intrude into the ownership of RRBs in the garb of expanding its
capital base. In that case RRBs' role mission of rural development will be
severely distorted.
Considering its overreaching inuence on the development of economy
for more than three decades, NABARD is today widely recognized as a
unique Development Financial Institution (DFI) in the country. But
consequent upon the restructuring of the nancial sector within the
current policy frame work, NABARD has also been targeted. During the
period the entire RBI holding in NABARD, nearly 73% of the total has
been off loaded to the Government of India. Only 1 % remains with RBI.
Most likely the Government will sell out its holding in the market and
pave the way for its privatization. Earlier Government put NABARD
under Income Tax net and NABARD Bonds ceased to be treated as
priority sector bonds from 1st April 2007. These measures were directed
to weaken the capital base of this Bank and make it totally dependent on
market borrowing for mobilization of resources and thus pave the way for
privatization. In the process country's agriculture and rural economy will
be hit hard.
The unchecked breeding of the NBFCs throughout the length and breadth
of the country has reached an alarming proportion causing concern for
everybody. The Saradha episode in West Bengal in recent times has
revealed the illegal modus operandi of these companies. The companies
have built up a wide range of clientele, collected huge money from the
public by giving them false promises of high return. In view of the
mushrooming of NBFCs, Sri Sachin Pilot, Central Cabinet Minister in
charge of the Ministry of Corporate Affairs wrote a letter in March 2013 to
the Finance Minister, Shri P. Chidambaram (The Hindu dt. 18.03.13)
stating his apprehensions - "2,200 rms not registered as NBFCs
committing nancial frauds ..... at present there are 34,754 such
companies (NBFCs) out of whom only 12,375 have been permitted by the
RBI to function as NBFCs under the RBI Act. It is the remaining 22,000 or

Banking Sector Reforms 42

so companies which mainly account for instances of cheating and fraud"
of common people in different parts of the country. Sri Pilot strongly
desired that RBI as the regulator of NBFCs should immediately intervene
and "penalize companies that are not registered with them as NBFCs" but
engaged in various fraudulent activities and urged the Finance Minister to
forthwith issue such instructions to RBI. RBI must not escape its
responsibility under the coverage of mere technicalities. The 22,000 or so
companies unregistered with RBI seem to be nobody's responsibility.
Even though they are registered under the Companies Act, the Ministry of
Companies Affairs cannot control them, neither the latter have the
expertise nor wherewithal to detect sophisticated nancial frauds
indulged in by such companies. The State Governments, which should
curb their activities, are found either wanting or reluctant or casual, while
mainly large number of poor people is robbed by them. It is also found that
a few of such unscrupulous entities, after defrauding people, simply
disappear for some time, and reappear in another name and form after
some time to resume their "y by night" operations. There is urgent need
to check them.
Financial Sector Legislative Reform Commission (FSLRC) Report:
A Death Knell for RBI
Financial Sector Legislative Reform Commission (FSLRC) was set up by
Government of India in March 2011 with a mandate to evolve the new
regulatory architecture for the nancial sector as a whole. The
Commission headed by Justice B. N. Srikrishna has submitted its
recommendations to the Finance Minister, Government of India on 22nd
March 2013. The recommendations have some dangerous implications
for RBI, taking away many of its functions and vastly diluting its
authority. Let us see some of the recommendations:
Public Debt should be taken away from the RBI without any pre-
conditions on scal consolidation.
Non-Banking Financial Companies should be outside the purview of
RBI should be stripped of its role in nancial markets.
RBI will have nothing to do with Forex Market.
Capital Controls should be rested with the Ministry of Finance.
The designation of Governor should be abolished and head of RBI
should be named as "Chairperson".
Banking Regulation and Supervision and the Payment & Settlement
System may be left with RBI but only for a temporary period.

Banking Sector Reforms 43

A statutory Monetary Policy Committee to be set up to take executive
decisions on monetary policy. There would be only 2 RBI members
and 5 External members appointed by the Government - each member
having a vote. Chairperson can give veto to the decision only by
explaining with a public statement.
It will be worthwhile to quote from a write-up by Sri S. S. Tarapore,
former Deputy Governor of Reserve Bank published in the Business Line
on May 3, 2013: "The Commission's Report reeks of an anti-Reserve
Bank of India (RBI) bias. The FSLRC game plan is to vivisect the RBI
Institutions which are not His Master's Voice should rst be destroyed,
which would enable the setting up of an obedient edice " He cautioned
ultimately - "one must remember that countries that destroy their Central
Banks destroy themselves". The unions of banking industry have
strongly denounced the recommendations of the Committee. All the
recommendations are directed to strip RBI of most important functions
which it is performing today. This is unfortunate because over the years
RBI has accumulated its skills in supervision of different segments of
nancial sector. The status and shape of today's nancial sector owes a
great deal to RBI.
In the context of global nancial crisis and misplaced emphasis on
ushering in private sector investments in all spheres including in retail
sector, a renewed emphasis on development of cooperative sector is the
need of the hour. Unfortunately, when the cooperatives combine the most
essential ingredients of group dynamics, democratic and collective
functioning ably dovetailed with group entrepreneurship and functioning
to internalize the market signals, the present central govt has probably
started to ignore the importance of this very useful sector. This has not
escaped the attention of even the Central Govt appointed High Power
Committee on Cooperative, 2009, when they observed "In terms of the
decent work paradigm .... cooperatives could lead the way by
demonstrating what we really mean by freedom, equity, security and
human dignity ..... Thus cooperatives by being true to their basic
principles provide locally-based answers to globalization cooperatives
are vital agencies to face the Challenges posed by globalization F ro m
the Ninth Plan onwards, cooperatives have found no mentionin the Five

"I do hope Finance Minister, Chidambaram will one day say, 'I am often frustrated
by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to
walk alone. But thank God, the Reserve Bank exists'." - Dr. D. Subba Rao, Former
RBI Governor
Banking Sector Reforms 44
Year Plans drawn up by the Planning Commission. It is important that due
recognition is given to cooperatives as a third sector of the economy and
its development, particularly in terms of its marginalized and weaker
segments .... "
Interestingly, when India, despite having a very rich legacy of cooperative
culture and ethos, started to neglect the sector. Various countries of the
world have started to use this sector as an effective buffer against the
onslaught of global nance capital. For example, in Brazil, when the
water supply and water resource management was targeted for
privatization, cooperatives proved to be a great success to thwart
privatization apart from ushering in efciency in water distribution.
Similar examples are galore from countries like Italy, France, etc. Before
the setting in of global nancial crisis, Italy which has no less than 4.13
million cooperative organizations, responded more effectively to the
changing global economic challenges by depending on small and medium
sized rms in cooperative sector. Similarly, in France today there are more
than 1.13 million cooperative organizations covering more than 90%
French farmers. In China too, a renewed emphasis is being given to
cooperative farming practices. This new form is based on the household
contract responsibility system (which was the hall mark of Chinese
market reforms in the country side) and encourages farmers to convert
their contracted land resources into stocks and become shareholders in the
newly formed cooperative rms. It is also necessary here that the
collective nature of resources be made clear, so that transfer, sale or
mortgage of land resource share are forbidden. According to some leading
Chinese academics (Enfu Cheng, Xiaoqin Ding in "Building China's New
Countryside: Multiple Modes of Collective and Cooperative Economy"
available in www.ras.org.in). in pushing towards this new cooperative
mode with land resources held as shares, one should fully consider the
conditions required for the conversion as well as willingness of the
farmers. Interestingly, several areas of China has already adopted this new
form of collectivization of agriculture through cooperative mode like the
Sonjiang area of Shaghai, where some 200,000 mu of farmland are
brought under this new form of cooperative farming. China has rightly
emphasized that the second leap of rural reform and development needs
the wide development of cooperative economy. At present the National
People's Congress is reported to be drafting and revising relevant laws on
cooperative economy. In China today, cooperatives are envisaged as
horizontal cooperation between farmers themselves and vertical
cooperation between farmers' organizations and companies as well as
cooperative farms of mixed economic modes.

Banking Sector Reforms 45

Globally the importance of cooperatives is wide AS noted in UN
documents like that in International Fund for Agriculture Development
(IFAD).lt informs us that ranging from small- scale to multi-million
dollar businesses across the globe. cooperatives operate in all sectors of
the economy. count over 800 million members and provide 100 million
jobs worldwide - 20% more than multinational enterprises. In 2008. the
largest 300 cooperatives in the world had an aggregate turnover of $1. 1
trillion. comparable to the gross GDP of many large countries. In Brazil,
cooperatives were responsible for 37.2% of agricultural GDP and 5.45%
of overall GDP in 2009 and earned about US $3.6 billion from exports. In
Mauritius, cooperatives account for more than 60% of national
production in the food crop sector and in Kenya the savings and credit
cooperatives have assets worth US $2.7 billion, which account for 31 % of
gross national savings. (Ref. www. ifad.org /media/ press/ 2011176.htm).
In such a background, NABARD's mandate to develop cooperatives
should be strengthened and broadened with adequate resources.
Governments should provide adequate support for the co-operatives.
Indian banking is currently in the midst of a transition driven by a change
in the nancial and banking policy regime of the government. The regime
change is motivated by a shift in perspective in which banking, which was
for long considered an instrumentality for rapid and more broad- based
and equitable development is now seen as a business aiming to make
prots partly from mobilising household saving and redirecting it into
protable investments and partly with generating fee-based incomes
through matching demands for resources with supplies of credit or
investment. The autonomy of RBI is curbed. Finance Ministry interferes
with all PSU Banks.
It bears emphasising that these changes are part of the overall change in
the economic policy regime involving external and internal deregulation
and liberalisation and neo-liberal scal and monetary reform. However,
there is reason to believe that the impact that the new regime has had on
banking has been among the principal mechanisms through which the
adverse effects of that regime on the poor have been transmitted.
Our analysis of both the conceptual errors underlying the liberalisation
strategy and the dangers involved in adopting it in the banking sector,
suggest that what is necessary is an alternative banking policy tied in the
nal analysis to an alternative strategy of development. While the long
term objective of such an alternative would be to raise the rate of growth

Banking Sector Reforms 46

and make it more broad-based, equitable and inclusive, the immediate
concern should be to restore social banking as one of the means to deal
with the agrarian crisis and acute agrarian distress facing the country and
the farming community.
In what follows we are concerned with selected aspects of that alternative
- with the institutional framework of banking, with the restoration of a role
for development banking and with credit delivery to agriculture, small
industry and small borrower. Such a policy, if it is to be appropriate for
Indian conditions must, inter alia, include the elements delineated in what
OWNERSHIP ISSUES Public Sector to Lead
Implicit in the Indian development banking model is the public ownership
of a major share of banking assets. This must continue. From the 1990s,
denationalisation of the banking sector has resulted from the
disinvestment of equity shares of PSBs domestically and from the entry of
new private Indian and foreign banks as a result of the freeing of the
conditions of entry. Both of these, especially the entry of new private
banks, have redened the functioning of the PSBs.
Further restructuring through liberalization has been suggested in the
recent ofcial pronouncements relating to foreign direct investment in
banking and mergers of PSBs. The international experience and the
accumulated Indian evidence of the past 23 years show the futility and the
dangers inherent in pursuing this neo-liberal strategy of bank
restructuring. The following recommendations - presented as negative
assertions - emerge from a careful review of the empirical evidence and
dene the minimum safeguards necessary to protect Indian banking from
powerful trans-national and private (national) investor interests.
International experience suggests that raising the FDI cap, permitting FII
investments in domestic banks and linking voting rights of private share
holders to their equity stake do not serve the objective of raising the rate of
economic and industrial growth. Rather, it enhances the vulnerability of
the nancial system, by encouraging risky investments, increasing
exposure to global capital and putting pressure on the government to
liberalise exchange rates and capital ows
Hence, following the July 2004 RBI guidelines, no single entity or group
of related entities should be allowed to hold shares or exercise control,
directly or indirectly, in any private sector bank in excess of 10 percent of
its paid-up capital. This is in the interest of diversied ownership as was
recognised by the RBI in its July 2004 guidelines. Hence the omission of
this clause in the roadmap for foreign bank presence released by the RBI

Banking Sector Reforms 47

on 28th Feb.2005, which limits itself to specifying the condition on one-
mode presence, needs correction." But the Government has gone ahead
increasing the share holding of individuals to 26% in Private Banks. It is
unfortunate that Axis Bank which was in the Public Sector (UTI) has been
Similarly, the amendments made in the Banking Regulation Act should be
reversed. The essential problem in seeking a greater role of FDI in the
domestic banking sector springs from the attendant loss of autonomy and
control on domestic policymaking and outcomes. The evidence from
many emerging market economies, particularly Latin America, shows
that a greater reliance on banking FDI has given rise to conditions of: (a)
stalled overall growth in credit with domestic banks also reducing loan
exposure; (b) far greater nancial instability during episodes of shock to
the domestic economy, and (c) uncertainty and slow economic growth due
to foreign banks acting as conduits for transmission of contagion and
strategic decisions from parent banks on to developing markets. It is to be
noted that these consequences are but an expression of the loss of
economic sovereignty. We can choose to ignore these lessons only at our
own peril.
The argument that the threat to domestic banking arising from an increase
in the foreign banking presence should be dealt with through
consolidation of domestic banks, which would also serve to strengthen
them and make them global players is without logical or empirical basis.
While the gains from consolidation are expected along greater economies
of scale and scope available to bigger banks, the evidence doesn't support
an automatic association between large size and protability. On the other
hand, bigger banks tend to rely much more on arm's length transactions
and standardised balance sheets and loan accounts, on fee-based incomes
that seek to avert credit and interest risk, and on trading risks in the
securities market. These tendencies give rise to the phenomenon of
nancial exclusion (whereby a large segment of the population remains
unbanked), result in lower credit provision and engender nancial
fragility via a greater exposure to nancial markets. To advocate bank
mergers as a general policy move and not as a carefully thought-out
measure to consolidate the gains of two banks, would be to lend
legitimacy to the above outcomes.
Consolidation also amplies the nancial fragility resulting from
liberalization in the form of increased exposure of banks to the 'sensitive'
sectors - commodities, real estate and the capital markets, where

Banking Sector Reforms 48

speculation is rife and returns volatile. Private banks have increased their
exposure to the stock market through acquisition of shares, advances
against shares and guarantees to brokers. Once the domestic nancial
sector is liberalized and then linked to external capital ows through
capital account convertibility, the probability of banking crisis, currency
crisis and nancial crisis increases manifold.
Dealing with these problems requires not merely restraining and even
reversing the change in banking policy regime, but a restoration of an
important role for an accountable central bank as a regulatory authority.
The shift in regime is accompanied by a combination of regulatory
forbearance and an emphasis on improved accounting practices, better
disclosure and new' capital adequacy norms. While these do not always
deliver on their regulatory objectives, the capital adequacy norms often
result in a contraction of bank lending.
Further, to restrict and reduce the fragility of the nancial system it is
necessary to: (i) rebuild the Chinese Walls separating the banks and the
stock market and drop proposals such as permitting banks to trade in
commodities exchanges; and (ii) strongly regulate the access of domestic
banks to global resources, which would also help improve monetary
management. It is becoming clear that SEBI cannot play the role in
preventing misuse of bank funds in the stock market, necessitating joint
supervision by SEBI and RBI.


An important component of an alternative policy is a revival of
development banking. However, a renewed stress on the erstwhile role of
development nance institutions (DFIs) would only be possible once the
segmented nancial market structure, wherein the DFIs service long-term
loans and in return have access to concessionary nance from the Central
Bank or the Government. Development nance institutions have been an
integral part of the credit delivery system in India with a very substantial
contribution to domestic capital formation in agriculture and
manufacturing industries. In the 1990s with the corporatization,
transformation into universal banks and subsequent privatization of the
DFIs, these institutions have lost their unique development perspective.
Even while the gap created by the transformation of institutions like the
IDBI and ICICI into universal banks needs to be lled, immediately the
further decline of development banking should be halted through the
restructuring of institutions like the IFCI and the strengthening of the state
nancial institutions and the SIDBI, for example.

Banking Sector Reforms 49

The most urgent and immediate need is to increase credit provision to the
rural areas for both agricultural and non-agricultural activities. If the
ows of bank credit to agriculture, small-scale industries and other
informal sectors have to be rapidly expanded, some comprehensive and
enduring strategy for credit delivery has to be put in place and the loss of
momentum spawned by the neglect of developmental goals by banks now
for over a decade has to be regained.
First and foremost is the need for further spreading of branch network
by scheduled commercial banks and RRBs. A palpable cause for
decline of bank lending to agriculture, to small-scale industries and to
small borrowers, has been the banks' professional reluctance towards
expanding their branch network in rural areas: The number of bank
branches operating in rural areas (classied uniformly on the basis of
the 1991 Census) has experienced an absolute reduction from 33,017
(or 51.7 per cent of the total) in March 1995 to 32,283 (47.4 per cent of
the total) in March 2003 and to 32,095 (47.4 percent of the total) in
June 2005. Given the option, the scheduled commercial banks would
not like to operate in rural areas. This has been proved clearly since ,
March 1995 after the disbanding of branch licensing policy and the
granting of freedom to bank boards to decide on their branch
expansion programme. Since then, there has been a reduction of
roughly 840 rural branches instead of an addition of at least 8,000 bank
branches in rural areas under the erstwhile policy thrust. This approach
has thus spawned a serious institutional vacuum in the rural credit
structure, which needs to be rectied.
Second, it is necessary to adopt a multi-agency form for the rural
network with well-dened roles for commercial banks, cooperative
banks, the regional rural banks and wherever feasible, micro-nance
institutions. The last of these, however, cannot be seen as a substitute
for a formal banking presence. The Business Correspondent operated
Customer Service Points and Ultra Small Branches should be
converted into small Bank Branches.
Third, with vast modern input requirements and diversication into
horticultural products and other allied areas underway, agriculture
would require a more sophisticated system of credit delivery, for
which induction of a sizeable number of qualied agricultural science
graduates and graduates with other relevant technical qualications
would be necessary. Considering this felt need, the renewed policy
thrust becomes an excellent opportunity for the government to

Banking Sector Reforms 50

generate an additional employment of about one lakh posts essentially
to rural and semi-urban branches of banks; Considering the past
neglect and the enormous business potential, it would not be too
ambitious a goal to induct another lakh of technically qualied ofcers
in the next ve years or so.
Fourth, it is necessary to move away from the current trend of moving
from the demand for bank-level protability to unit- and even
transaction-level protability, as this forecloses cross- subsidisation as
a means of sustaining social banking. It is bank-level protability that
must be emphasised, and even this must be supported with an effort by
the state to carry some of the risk provisions and costs of social
banking in its budget.
Fifth, it is necessary to reinforce close coordination between district
planning authorities, Panchayati Raj institutions and the banks
operating in rural areas. The system of district-level coordination
committees of bankers has apparently become inactive; it needs to be
reinvigorated with clear guidelines on respecting the bankers'
commercial judgments even as they fulll their sectoral targets. Non-
agricultural activity being developed as part of a local level plan
should be supported with bank lending, as happened with town and
village enterprises in China, to facilitate faster and more employment
intensive growth in the rural sector.
Sixth, rather than using Self-Help Groups as banking agents, in a new
version of agency banking, what is required is to link SHGs to bank
credit and encourage banks to provide expertise for marketing,
accounting etc. Banks have to take a pro-active role in promoting
productive activity through the SHGs.
Seventh, there is need to set up an appropriate monitoring system for
social banking and introduce a system of rewards and penalties for
social banking performance, particularly in regard to the priority
sector lending targets across bank types. Despite the increasing
number of heads and higher investment ceilings that are now eligible
as priority sector advances, some private and foreign banks routinely
fall short of the investment target, which underscores the need to
strengthen regulatory oversight. While this needs to be corrected, the
incessant dilution of the denition of priority sector advances that
undermines the scheme needs to be reversed. A reappraisal of the
denition of priority sector must also set individual oors for strategic
sectors such as direct agricultural advances, loans to small-scale
industries within the overall priority sector credit target since these

Banking Sector Reforms 51

sectors obviously lie at the lower end of the pecking order of
investment preferences of banks. Finally, given the declining ratio of
credit to deposit especially in the rural areas and backward states the
present practice of expressing priority sector credit as a share of total
credit underestimates the extent of rural disintermediation. A more
appropriate practice would be to use deposits in the denominator of the
Finally, it is necessary to set up a mandatory system of reporting to the
Parliament and state legislatures of performance and progress on the
social banking front. A comprehensive, periodic report on policies,
practices and statistics relating to social banking should provide the basis
for informed public debate.
There is reason to believe that the erosion of scal policy space and the
growing emphasis on the independence of the central bank have not
merely reduced the availability of resources for development banking, but
removed any need to support banks undertaking unusual risks in lending
to disadvantaged sectors and populations. Monetary policy and scal
policy should be so designed as to make available resources for
development and social banking and guarantee the risk implicit in
activities with substantial social returns and benets.
These are some of central elements of an alternative banking regime
which the government must immediately adopt and implement.
Reserve Bank should be given autonomy from the Finance Ministry and
allowed to operate with its own wisdom which saved the Indian Banking
System from the US & European Financial crises. It is Regulatory system
of RBI and the powerful struggles of Bank employees under the banner of
United Forum of Bank Unions which saved our Banks from the Financial
NABARD should be given more funds and autonomy to expand its reach
to the rural areas and develop agriculture and allied activities. NABARD
also should be made the regulator of SHGs. With guidelines given by
The Government should strengthen Co-operative sector which is catering
to the weaker section, agriculturists and artisans instead of trying to
strangulate the co operatives.

Banking Sector Reforms 52

Regular works are being outsourced. The labour is exploited with low
salary. Business Correspondents and Business Facilitators are paid poor
salary. There are many cases of frauds committed by outsourced person.
Public Sector Banks have contributed a lot to the growth of the economy
with focus on development banking and social Banking. They have to be
strengthened and move to privatise them should be stopped.
Bank employees today are getting lesser salary than Government
employees, private sector and even lesser than under qualied workers. It
is imperative that they are provided with a decent wage taking into
account their contribution to the development of the economy.
Salary Revision for Central Government employees will be effected
based on Pay Commission recommendations once in ten years and their
present salary is as per Sixth Pay Commission recommendations. Before
1979, bank ofcer's salary used to be higher than the Group A ofcer of
Central Government. To have a parity with Government employees,
Pillai Committee was constituted in 1979 and as per the Committee's
recommendations the pay scales of bank ofcers were rationalised and
made at par and aligned with Pay Scales of Government Ofcers.
Such parity was distorted to the disadvantage of bank ofcers by
implementing 4th, 5th and 6th Pay Commission Recommendations at much
higher levels and the salary difference at all levels is alarmingly high. To
quote, the bank ofcers' gross pay slip amount at initial stage is about
Rs.30700/- as against Rs.56400/- for Government ofcers. Similar
differences exist at different stages in the hierarchy. It has caused serious
impact on the quality of recruits in a highly sensitive sector like banking
which involves dealing with public money.
Many State governments have adopted 6 Pay Commission
recommendations and many Public Sector Undertakings have also
adopted them as bench mark for salary revision which has created a huge
ap between the bankmen on one hand and government employees and
PSU employees on the other.

If doctors are paid the same salary as bus drivers, community would not be crazy about
making their children doctors Nouman Ali Khan

Banking Sector Reforms 53

The comparative scales since 1979 are as under:-
Basic Pay Basic Pay
Group-A Ofcers of Scale-I Ofcer in
Govt. of India a Bank
Prior to 1979 Rs.450/- Rs.500/-
In 1979 Rs.700/- Rs.700/-
In 1986 Rs.2,200/- Rs.2,100/-
(4 pay commission from 1987) Rs.8,000/- Rs.7,100/-
In 1996 Rs.12,500/- Rs.10,000/-
(5 pay commission from 1997)
In 2006 Rs.15,600/- + GP Rs.14,500/-
(6th pay commission) Rs.5,400/-
Total Rs.21,000/-
7th Pay Commission projected Rs.63000/- ?

Public Sector Banks operate in a disciplined manner by observing

compliance of regulatory requirements and in fact it was because of
this that the Indian banks have emerged relatively unharmed from
the recent global nancial crisis.
The ten lac ofcer and workmen employees of banking sector have
actively involved in nation building by effectively implementing
national agenda of employment creation and economic & Industrial
growth and enjoy lot of respect and popularity particularly in Rural &
Semi Urban areas.
The work force of Public Sector Banks are responsible for increase :
1. In the Business Mix of the Public Sector Banks from Rs.53,71,959
Crore during the year 2008-2009 to Rs.102,18,471 Crore during the
year 2012-2013.
2. in Operating profit from Rs.45,495 Crore during 2008-2009 to
Rs.1,21,917 Crore during 2012-2013.
3. in Net Prot from Rs.34,382 Crore during 2008-2009 to Rs.50,583
Crore during 2012-2013.
4. in Total Income (interest and other income) from Rs.3,15,554 crore
during 2008-2009 to Rs.6,11,658 Crore during 2012-2013.
5. in the Net Prot for the year 2012-2013 to Rs.50,583 Crore after
providing for NPA Rs.46,021 Crore due to huge slippages during the

Banking Sector Reforms 54

year 2012-13 of Rs.1,19,613 Crore. Addition to NPA has affected the
net Prot in two ways. It has not generated income and the provision
has further drained the income.
Thus it is imperative that bank ofcers and workmen are adequately
compensated due to their growing responsibility, transferability and
accountability in order to maintain high standards of honesty and
integrity, as their job demands, in the highly competitive and sensitive
sector of the Indian economy, particularly in view of the following facts:
1. That bank ofcers who were getting more than government ofcials
earlier, were brought at par with Government ofcers on
implementation of Pillai Committee report in, 1979, are now getting
approximately Rs. 20 thousand less than government ofcials at rst
stage of the pay.
2. It is pertinent to mention here that 7 pay commission has been
constituted for revision in salaries of Central Government employees,
whereas Bank employees have yet to catch the salaries they are
getting as per 6th pay commission report.
3. There is steep rise in the CPI ination and the salaries in absolute
terms have also been eroded. Consumer price index has already
increased by 1501 numbers over 4440 which was prevailing on
01/11/2012 i.e. the level at which IBA has agreed to merge the DA
with basic pay.
4. The productivity per employee, the business per employee and branch
and protability of the public sector banks have enhanced many folds.
5. There is a danger of pouching of the existing young and trained staff
of the Public Sector Banks by the new generation Private Sector
Banks and Foreign Banks which will emerge as per new Banking
6. The unhappiness of the highly qualied youth who have joined the
Public Sector Banks is seen widely in facebook.
7. As the Bank Ofcers and employees contribute a lot for the
development of the economy and have to take business risks they have
to be adequately compensated.
Majority of the foreign countries follow ve day week. RBI follows ve
day week. Central Govt also follows ve day week. The Software

Paying your employees well is not only the right thing to do but it makes for good business .
Jim Sinegal, CEO, Costco

Banking Sector Reforms 55

industry and many of the multi national corporations follow ve day
week. In an environment where 62% of the transactions are done through
alternate channels, introducing ve day week will reduce expenditure,
save energy and also provide adequate rest and recuperation for the
employees. (Annexure: Note on 5 day week)
The Political Parties, Elected Representatives and Policy Makers have to
take into account the experiences of the past and present and prepare a new
road map for the Development of the country with focus on equity,
equality and social justice as enshrined in the constitution. Banking
Sector can turn around the country and our Beloved Nation can become a
model for the globe.

Banking Sector Reforms 56

Note On Five Day A Week
& Regulated Working Hours
D. Thomas Franco Rajendra Dev
The demand for 5 day a week in the Banking Sector is based on scientic
practices with regard to the health of the employees, productivity and
environmental concerns. We put forward the following which explains
and justies the need.
The ILO has passed many conventions on this issue, some of which are
reproduced below:
Article 19
C047 - Forty-Hour Week Convention, 1935 (No. 47)
Convention concerning the Reduction of Hours of Work to Forty a Week
(Entry into force: 23 Jun 1957)Adoption: Geneva, 19th ILC session (22
Jun 1935) - Status: Instrument with interim status (Technical
The General Conference of the International Labour Organisation,
Having met at Geneva in its Nineteenth Session on 4 June 1935,
Considering that the question of the reduction of hours of work is the sixth
item on the agenda of the Session; Considering that unemployment has
become so widespread and long continued that there are at the present
time many millions of workers throughout the world suffering hardship
and privation for which they are not themselves responsible and from
which they are justly entitled to be relieved; Considering that it is
desirable that workers should as far as practicable be enabled to share in
the benets of the rapid technical progress which is a characteristic of
modern industry; and Considering that in pursuance of the Resolutions
adopted by the Eighteenth and Nineteenth Sessions of the International
Labour Conference it is necessary that a continuous effort should be made
to reduce hours of work in all forms of employment to such extent as is
possible; adopts this twenty-second day of June of the year one thousand
nine hundred and thirty-ve the following Convention, which may be
cited as the Forty-Hour Week Convention, 1935:
Each Member of the International Labour Organisation which raties
this Convention declares its approval of--
(a) the principle of a forty-hour week applied in such a manner that the
standard of living is not reduced in consequence; and

Banking Sector Reforms 57

(b) the taking or facilitating of such measures as may be judged
appropriate to secure this end;
and undertakes to apply this principle to classes of employment in
accordance with the detailed provision to be prescribed by such separate
Conventions as are ratied by that Member.
Article 8
How is work during the weekend regulated?
I LO Weekly Rest Conventions No. 14 (1921) and No. 106 (1957) require
that each worker have at least 24 hours of uninterrupted rest every seven
days. Whenever possible, the rest day(s) should be simultaneous for all
employees of an undertaking and correspond with the traditions and
customs of the country. As noted above, Arab countries often choose the
Friday, instead of the Sunday, as the rest day for the week. In China and
Hungary, two days off are laid down in national laws. In European Union
(EU) member States, the EU Working Time Directive (93/104) entitles
workers to a minimum of 24 hours of rest per week, principally on Sunday,
in addition to 11 hours of rest each working day (between shifts). In most
countries, although only one day off per week is prescribed in national
legislation, collective agreements or commonly accepted norms set the
standard of a ve-day week.
Following are the benets of a 5 day work week:
1. Reduced fuel costs. Employees would have to endure the dreaded
commute one day less each week, thereby saving money at the pump
with reduced fuel consumption.
2. Decreased absenteeism. On a six-day schedule, employees are
forced to cram their one day off with personal errands, chores, games,
and social outings. By the time Monday comes around, there hasn't
been a minute of rest and employees are tired. So they call out of
work. This wouldn't happen so frequently if employees have a second
day to accomplish the work they have to do outside of ofce.
3. Increased productivity. It's a well-established principle of
productivity that workers become less efcient where no deadline
looms. That's why we're more efcient in the week before
vacationwe know, we have to get it done by the time we leave. The
same idea is transferable to a shortened workweek. Employees are
least productive on Saturdays so why not just eliminate them
4. Improved job satisfaction and morale. Satisfaction with what goes
on in the workplace may be tied to what goes on outside the

Banking Sector Reforms 58

workplace. Employees who spend more time with family and friends,
who have the exibility of two days off, will return to work refreshed.
5. Reduced personnel turnover. Happier employees tend to leave less
often. If they like the job, they're more likely to stick around.
6. Reduced energy costs. By closing for two, instead of one day each
week, Banks stand to reduce substantial energy costs. These costs can
be signicant.
7. Improved work-life balance. As a result of the added day,
employees who work a ve-day week will have more time to spend
with their families and friends.
8. Reduced trafc congestion. This potential effect may be seen
largely on Saturdays, which is the day most employers are converting
to a non-working day.

The First Company to give 5 day week:

It was Heny Ford who introduced the 5 day, 8 hours per day, work week
for the rst time in 1926. Ford was tired of continuously losing good
employees, he was trying to increase employee retention and at the same
time increase prots, so he basically doubled wages and implemented a 5-
day work week, and in the process effectively invented the modern
weekend. It is Henry Ford who is widely credited with contributing to the
creation of a middle class in the United States.
His reasons had nothing to do with charity, and everything to do with
increasing prots and dealing with the forces of competition. It is also
proved that every reduction of the length of the work week has been
accompanied by an increase in real per-capita income.
The New Economics Foundation has recommended moving to a 21 hour
standard work week to address problems with unemployment, high
carbon emissions, low well-being, entrenched inequalities, overworking,
family care, and the general lack of free time. The Center for Economic
and Policy Research states that reducing the length of the work week
would slow climate change and have other environmental benets.
Around the world
Chile, China, Colombia, European Union, Austria,Bulgaria, Czech
Republic, Denmark, Estonia, Finland, France, Hungary, Ireland, Ireland,
Italy, Latvia, Poland, Portugal, Romania, Spain, Sweden, United
Kingdom, Pakistan, Tunisia, Japan, Mexico, Mongolia, Newzealand,
Russia, USA etc. work ve days a week from Monday to Friday.

Banking Sector Reforms 59

Islamic countries:
Saudi Arabia has a Thursday- Friday weekend and Oman, Algeria,
Bahrain, Bangladesh, Egypt, Iraq, Jordan, Kuwait, Libya, Malaysia,
Kelantan, Terengganu, Kedah, Mauritania, Qatar, Sudan, Syria , United
Arab Emirates, Lebanon, Israel etc have a Friday- Saturday week end.
In our country:
In the light of the revolutionary changes that have taken place as regards
the technology initiative, such as tele-banking, Internet banking, core
banking, any time banking and anywhere banking and also the banking
expansion through a large ATM net work, there is a strong case for
immediate consideration of demand for introduction of a 5 day week.
62% of the Banking Business is done by alternate Channels of Banking as
per RBI. This will also reduce global warming to an extent. Further, 5-day
week will provide good health to bank employees and reduce expenditure
on electricity and fuel.
So there is total justication for 5 day week to be introduced in the
Banking Industry following the footsteps of RBI which has dened 8
hours work, ve day week and exible working hours.

Banking Sector Reforms 60

K. Ananthakumar
General Secretary


Cost to Company is the amount that the Company (Employer) spends
on their Employees. In other words, the amount the Company spends
either directly or indirectly for employing a person.
For the purpose of clarity, CTC may be dened as the aggregate sum
which an Employer spends on an Employee and conveyed by way of
offer letter but the salary disbursed will be much lesser than the
CTC Cost to Company is a deceptive package wherein the Employer
shows that they are paying a big salary but unfortunately it is otherwise.
They overload total expenses of human resources on salary but
actually disburse less resulting in - SHOW MORE PAY LESS -
concept. The facilities extended by the employer have added to the cost
which means that we pay from salary for getting those facilities which
some times we may not use / require .
On account of the above , if we calculate the gross pay per month as per
the offer letter it will be much higher than the take home pay the
employee will actually receive as salary on monthly basis.
Different Companies pick up different sets of components to constitute
their own CTC from the following :


Basic Pay PF Contribution
Dearness Allowance Various allowances reimbursed
(which are bank specic)
House Rent Allowance a) Conveyance
City Compensatory Allowance b) News Paper
PPA & PQA c) Mobile/Telephone
d) Entertainment Expenses
e) Medical Expenses
f) LTC
Banking Sector Reforms 61
g) Bank specic benets
incidental to employment.
h) Loans given at concessional
rate of interest.
i) Canteen Subsidy
j) Superannuation cost
* Pension
* Gratuity
k) Leave encashment
l) Provision of Car/Driver at
different level
m) Bonus/Performance linked
n) Variable pay component
which constitute 60% of total
pay per month.
Government / IBA advocating CTC in the wage revision talks expose their
ignorance. CTC includes not only the salary that reaches the hands of
the employee but also includes many other benets that are statutory
like PF and others like Quarters rent, Medical Insurance, LTC etc.
Some companies may even include proportionate rent of ofce cubicle
given to an employee. While the nature and quantum of benets vary
from company to company , the benets that are included in CTC also
vary from company to company. It is strange of Government / IBA
talking of CTC when benets vary from bank to bank, like quarters
rent, conveyance allowance etc and more so SBI having different pay
package on account of Pension as third benet and also additional
pay and additional DA drawn by SBI employees conventionally / for
historical reasons. The Pay and Allowances also vary depending on the
place of posting.
Hence it is not possible to have a uniform industry-level CTC for
1) CTC to bank may not have constitutional validity because of the
following :
i) CTC will have a xed pay and variable pay where the latter is
linked to performance parameters. Since we are not going to

Banking Sector Reforms 62

have uniform variable pay and it will be against the principle
of equal pay equal work', a constitutionally guaranteed
fundamental right to equality.
ii) Only on this fundamental right to equality, Regional Rural Banks
won a tribunal award for pay parity with sponsor banks. We can
not cause breach of this fundamental right to equality by going to
have differential variable pay.
iii) If there is going to be uniform variable pay, how are we going to
have a uniform industry level performance parameters, when
it is almost impossible to have uniform performance
parameters even within a bank?
iv) Also, Variable pay can not be left to different banks' perception to
quantify Vis--vis attainment of set goals with different
benchmarks in different banks.
2) CTC is conceptually incompatible with industry level wage
xation because-
i) CTC is company specic but every bank is having its own set
of benets. The benets which are available in each bank are
due to historical reasons and settlements and hence the same
to be continued in the individual banks.
ii) CTC is negotiated with individual employee and not a
collective bargain through negotiated settlement.
3) CTC is difcult of implementation in Banks because -
i) variable pay requires measurement of performance which is
possible only in case of quantiable output.
ii) Duties of most functionaries except those of a branch manager
will not have quantiable output.
iii) Performance measurement will be more subjective due to lack of
objective parameters for most functionaries/employees.
iv) The duties even among managers in all centres are not
homogenous to have a fool-proof objective parameters of
v) No level playing eld can be ensured as one branch may have
better location, efcient staff and good clientele.
vi) Performance outcomes in banks often depend on uncertainties of
not only domestic markets but also the global nancial markets
which are signicantly integrated to Banking Sector in our

Banking Sector Reforms 63

vii) Banks in Public Sector are not allowed to function on pure
commercial considerations as the Government utilizes the banks
as vehicles of social upliftment. It is difcult to measure the
performance of employees doing mass banking where the
protability is given less importance.
4) CTC is inimical to the interest of the bank because-
i) Unlike other industry, Risk management plays a vital part in
banking. Banks work on thin spread which can be completely
eaten away if a small portion of its assets become contaminated.
ii) Aggressive banking is anathema to risk management whereas the
incentive based variable pay would only be a breeding ground for
adventurous banking.
iii) The banking crisis of the USA & Europe was mainly due to
this incentive based pay to their employees / executives.
iv) Everybody's variable pay depends on performance that will be
more subjective in banks. Hence, the subordinates have to
please their superiors who in pursuit of aggressive targets will
bend rules with no checks and subordinates will be blind to
the dangers of such aggressive banking.
v) There is often sector-specic political interference in bank
lending a la Civil Aviation in recent times, food credit etc.,
which affect the paying capacity of the banks concerned.
vi) CTC in short will compromise every bank's interest across the
CTC is against constitutional validity, conceptually incompatible,
strategically inimical to the interest of the bank and difcult for
In view of the above, we must wholesale reject Cost to Company
proposed by the Government / IBA .
Pillai Committee established parity of pay between Public Sector Bank
Ofcers and the Group A ofcers of the Government of India. V and VI
Pay Commissions have caused distortions, to the detriment of Bank
ofcers. We demand restoration of Pay Parity with Group A Ofcers of
the Government of India. The parity should include similar pension with
the provision of up-dation and up-gradation. The Public Sector Banks
being vital instrumentalities of the Government, should be brought
under the ambit of Central Pay Commission for the purposes of Pay
and Allowances.

Banking Sector Reforms 64

AIBOC's response to RBI's Discussion Paper on
Structure of Banking in India The Way Forward
J D Sharma, President, IOBOA
Ravi N Shetty, Senior Vice President, IOBOA
P V Mohanan, General Secretary, DBOO
The monetary policy statement announced by Reserve Bank of India
Governor on 3rd May 2013 in Mumbai stated that the guidelines on
licensing of new banks in the Private Sector issued in February 2013
indicated that the Reserve Bank would prepare a policy discussion paper
on the banking structure in India within two months keeping in view the
recommendations of Committee on Banking Sector Reforms 1998
(Chairman: Shri M Narasimham), the Committee on Financial Sector
Reforms 2008 (Chairman: Shri Raghauram Rajan) and other view points.
The discussion paper was expected to cover issues such as consolidation
of large-sized banks with a view to having a few global banks, desirability
and practicability of having small, localized banks as preferred vehicles of
Financial Inclusion, the need for having investment banks with
differentiated licensing regime for domestic and foreign banks instead of
granting of universal banking license, policy regarding presence of
foreign banks in India, conversion of Urban Cooperative Banks into
Commercial Banks and periodicity of licensing new banks whether on
block or on tap.
Reserve Bank of India released the much awaited discussion paper on
banking structure in India on 27th August 2013. The discussion paper
identied certain building blocks for the reorientation of the banking
structure with a view to addressing various issues such as enhancing
competition, nancing higher growth, providing specialized services and
furthering Financial Inclusion. The paper also emphasized the need to
address the concerns arising out of such changes with a view to managing
the trade off for ensuring nancial stability. The envisaged policy will be
required to be in the back drop of strong regulatory and supervisory
regime with increased intensity for supervision for the systemically
important banks. The overall thrust for reorientation is aimed at
imparting dynamism and exibility to the evolving banking structure
1.Contrary to the claim that privatization and free market reduce corruption, evidence shows
that the black economy and the propagation of corruption has expanded under such
policies, and is now almost 50 per cent of the GDP of the country. (Global Financial Integrity,
Banking Sector Reforms 65
while ensuring that the structure remains resilient and promotes nancial
stability. So far so good; we wish that the ultimate objective was as noble
as it is made out to appear!
Before dwelling on the issues covered in the discussion paper, it is
important to have cursory look at the efcacy of regulatory & monetary
tools of the Central Bank to check the ination and exchange rates in last
few months. The untamed inationary pressures have not only played
havoc on the economy of the country but have also robbed the poor and
not so rich of their purchasing power. The people living on xed income
are nding it difcult to arrange two square meals a day. The
consequences of weakening rupee largely caused by the ight of foreign
capital from the country on the rumors of tapering of stimulus package by
the Federal Reserve/American government have been enormous. The
outow of foreign capital from India had double-edged effect on the
country. It had created volatility in the currency market by surging
demand for dollar and weakening local currency on one hand and
widening the current account decit on the other. It is the responsibility of
the regulator and the government to ensure stability, growth & exibility.
We need to create a resilient and robust regulatory framework to ensure
that the economy is protected against the intermittent shocks of
In the above background, it is recollected that our nancial sector was able
to withstand the shocks of US Financial Crisis 2008, Public Debt Crisis of
UAE, Eurozone Crisis of 2011-12 for the simple reason that the Trade
Unions in the banking sector have resisted the unbridled changes on the
part of government to hugely integrate various sectors of our economy
with the global market, more particularly full Capital Account
Convertibility. This positive role of Trade Unions was acknowledged by
none other than the governor of RBI in 2008-09. There is need to
strengthen the existing banking system and enhance its efciency of
operations rather than attempting large scale structural changes on
experimental basis. Any failed experiment in banking sector will be
disastrous as India does not have the nancial power of America which
could afford to provide capital support and other stimulus packages to the
failing banks and other nancial institutions in the aftermath of sub-prime
mortgage nancial crisis. The managers of Indian economy need to focus
more on upliftment of poor sections of society through effective Financial
Inclusion not by merely opening 'No Frills Accounts' and using such

2. The total accumulated capital and assets held by Indians abroad is estimated to be in the
range of half a trillion dollars (Rs. 25 lakh crore) to 1.4 trillion dollars (Rs. 70 lakh crores).

Banking Sector Reforms 66

accounts for Direct Benet Transfers but by building capabilities amongst
the people in socially and economically neglected sectors to help them
earn their livelihood to sustain their families. The country offers huge
potential for development of infrastructure, reduction in corruption not
only in government but also in its entities and private enterprises,
providing health care & sanitation, efcient water management both for
drinking purposes and prevention of oods/draughts etc. The banking
institutions in the present form can play signicant role in pursuing such
agenda of the government and hence must be so utilized keeping in view
the objectives of nationalization of banks by earlier Congress
Any signicant tinkering of the existing banking structure by way of
experiments either through mergers by reducing the number of
competitors in the banking space which runs a counter to the current
moves of RBI and government to increase the number of competitors by
considering the applications for issuance of new banking licenses and also
permitting liberal entry of foreign banks either through the branch
licenses or through the subsidiary routes, is a completely unwise,
untimely and premature.
The Discussion Paper on Banking Structure in India The Way
Forward released by RBI on 27 August 2013 covers the following
1) Small Banks Vs Large Banks
2) Universal Banking
3) Continuous Authorization
4) Conversion of UCBs into Commercial Banks
5) Consolidation
6) Presence of Foreign Banks in India
7) Indian Banks' presence overseas
8) Government ownership
9) Deposit Insurance and Resolution
10) Indicative reorientation of the banking structure
To have a better understanding of these issues and before examining and
evaluating them critically, it is considered appropriate to examine the
recommendations of the Narasimham Committee, Raghuram Rajan
Committee and other viewpoints which incidentally also formed the basis
of the RBI's Discussion Paper mentioned above.
The small banks Vs large banks theory recommended by Narasimham

Between 1996 and 2012, there have been 2.90 lakh recorded farmer suicides.

Banking Sector Reforms 67

Committee more than two decades ago had not found favour with
successive governments at Centre and the Central banking authority. The
experiment with universal banking has resulted in Asset-Liability
mismatches and increased NPAs of the commercial banks. Continuous
authorization is as undesirable as the current attempts to increase the
number of players in given banking space and thus reverting back to the
banking era of pre-nationalization days. The move to convert Urban
Cooperative Banks to Commercial Banks can be more purposeful if such
banks are allowed to be taken over by the Public Sector Banks. The
consolidation theory for Public Sector Banks is self deceptive since mere
consolidation does not enhance the nancial strength in true sense
because the corresponding exposure also increases. The banking
institutions in Public Sector have the potential to perform better if their
Boards are strengthened and allowed independence & freedom to manage
the banks in professional manner completely devoid of bureaucratic and
political interference in the matters relating to Human Resources and
lending operations. This experiment will prove to be safe and sound
unlike the move to consolidate through mergers of Public Sector Banks.
The government ownership of the banks has been serving its avowed
objectives and there is still a large unnished agenda. The government
should focus on converting the Indian economy to a developed economy
which calls for the active nancial and policy role to be played by the
government. Any weakening of either nancial or policy role on the part
of government will result into further procrastination of the fulllment of
the dream of alleviation of poverty from the country. The government
must therefore continue to stay invested in the banking institutions of the
country and there is a strong case to expand the size of Public Sector
banking which is the lifeline of Indian economy.
Narasimham Committee recommendations heralded the nancial sector
reforms since the beginning of globalisation of our economy. Many of its
recommendations were implemented and many were not as there was lack
of acceptability of those by the government and the Regulator coupled
with a strong opposition by the Trade Unions in the banking sector. But
we must realize that the capitalist model of business world-over has been
so powerful that it has almost uprooted the socialist model of business
from the world. The determination on the part of the champions of
capitalism has been so strong that it has been continuously nding more
and more friends. The multinational agencies like International Monetary
Fund, World Bank, GATT, UN & its Subsidiaries etc., have been acting as
80% of rural and 64% of urban households consume less than the recommended calorie of
Banking Sector Reforms 68
a breeding ground for the new generations of the promoters of capitalism.
The domination of capitalist powers in such multinational bodies has been
so strong that it has created many takers of their capitalist philosophy in
Indian Establishments too, to say the least. Hence the so called new
generation reforms are strongly recommended and pursued by such new
generation champions of privatization and capitalist model of economic
development. If one has to discern the recommendations of Raghuram
Rajan Committee on nancial sector reforms, he would not discover
anything different from what is aimed at by Narasimham Committee
recommendations. The only difference between the recommendations of
the two Committees being the road map to reach the destination as
Narasimham Committee suggested the reforms in a crude manner and
Raghuram Rajan Committee has suggested the sweet pills of milder
potency with a longer period of experimentation. In his report A
Hundred Small Steps Raghuram Rajan has made vide range of
proposals with a suggested sequence to achieve the agenda of same
reforms which were projected by Narasimham.
It would be interesting to learn that the Raghuram Rajan Committee on
nancial sector reforms was constituted by the Deputy Chairman of
Planning Commission and not by the RBI or the government of India
which exercise dual control over the banking sector and are accountable
for its growth & development. The suggestion by the Raghuram Rajan
Committee to privatize the Public Sector Banks or bring down the
government equity below 50 per cent (33% to be prcised) with still
having control on shares and sell some of the smaller under-performing
Public Sector Banks to Private or Foreign banks on an 'experimental basis'
with the observation 'if it succeeds it can be replicated and if it fails,
sky is not going to fall' is highly irresponsible as it undermines the
seriousness of the issue that the hard earned savings of the people of the
country are at stake. Raghuram Rajan cannot make light of such a serious
issue as it is the faith of the people in Public Sector Banks that they have
invested their money in and any irresponsible experiment of the suggested
nature will result in avoidable & unwarranted nancial disaster which will
put a sudden extra burden on Deposit Insurance Corporation while
increasing the accountability of RBI and the government in such an
The very constitution of the Raghuram Rajan Committee on Financial
Sector Reforms speaks volumes. A reading of the recommendations
would reveal that they largely revolve around destroying the Public Sector
Between 2009 to 2013 shares worth of Rs.91000 crores of Public Sector Units have been
Banking Sector Reforms 69
character of our banking institutions. The committee of 12 members
included K V Kamath from ICICI Bank and Uday Kotak of Kotak
Mahindra Bank to represent the Private Sector Banks with about 22 per
cent of business/market share whereas the Public Sector Banks having 70
per cent market shares were represented only by one representative viz., O
P Bhatt of State Bank of India. At certain places it is stated in the report
that there was no consensus in the committee but still it is desirable to
carry out the proposals. The report is devoid of any disclosure about the
weightage assigned to O P Bhatt who represented Public Sector Banks
which were largely the targets for nancial sector reforms. Another
interesting aspect of the constitution of the committee is the non-inclusion
of any representative from RBI, the Regulator. The seriousness of such
omission gets further compounded by the fact that one of the terms of
reference was to identify changes in regulatory & supervisory
infrastructure that can better allow the nancial sector to play its role
while ensuring that risks are contained. It is beyond comprehension that
the Chairman of the committee who has been groomed in atmosphere of
American economy was considered competent to suggest changes in the
regulatory & supervisory infrastructure in Indian context without even
being assisted by any representative from such Regulator.
Raghuram Rajan who was credited with forecasting the US Financial
Crisis much before it erupted is also conscious of the fact that Sub-prime
Crisis in America and high competitive price at home has deepened many
people's suspicion that nancial markets are merely gloried casinos
manipulated by the speculators. Despite this, he courageously suggests
serious business like nance against warehouse receipts to help banks
achieve their targets for agricultural lending. It surprises us that instead of
helping the poor farmers by ensuring provision of timely and cheaper
credit, the prescription to nance against warehouse receipts is aimed at
helping the rich traders indulge in hoarding of Agri-produce and build
their capabilities to create articial shortage of food grains in the country
where the distribution chain suffers serious deciencies. It would be
interesting to see whether Raghuram Rajan now charged with the
responsibility of containing the price rise and checking ination will still
promote such nancing instruments which are detrimental to the core
function of RBI, ie., to keep the ination within manageable range. It
would have served the interests of the country better if the committee has
taken cognizance of rising incidents of frauds by the traders and business
enterprises while borrowing from the banks. The complicity of
Of the 15-29 age group of youth who number 330 million (33 crore) the unemployment rate
is 13.3%.

Banking Sector Reforms 70

warehouse keepers including those owned by the government in
perpetrating frauds on banks in nancing against warehouse receipts has
been responsible for banks losing public money and being driven to
avoidable litigations. The agencies suggested for certication of
warehouse receipts cannot be taken on face value in view of the past
experience of the banks not only in this area but also in the area of
approved Lawyers and Valuers who have been giving false reports to the
banks for petty considerations and thus exposing the public money to
great risks. The major share of banks' NPAs is contributed by such loans
& advances which are collateralized by such properties for which either
the Lawyers have given wrong opinion or the Valuers have given inated
The committee headed by Raghuram Rajan is under the illusion that the
availability of cheaper credit is the remedy for all the ills of real sector of
the economy. It could be so in American context but in Indian context, it is
more important to ensure round-the-clock power supply at fair price to
avoid lay-offs and lock-outs for want of power, reduce the excise and
other government taxes, eliminate the power brokers and corruption in
high places etc. Many industrial Units become sick in India for want of
regular power supply. It has driven many industrial houses to have their
own captive power plants which have been vying for their share of natural
resources like coal and thus giving rise to avoidable scams like 'coalgate'.
If only the government had continued to carry out its responsibility of
power generation & distribution at fair price, it would have served the
Indian industrial sector a great deal better. The implications of the
proposals of the committee are far reaching in many areas and a detailed
dissertation of the recommendations will throw more light on the
dangerously tending aspects of the report.
Macro Economic Framework
Raghuram Rajan Committee had identied three reasons for nancial
sector reforms
(i) To include more Indians in growth process
(ii) To foster growth itself
(iii) To improve nancial stability, exibility and resilience with a
view to protecting the economy against the kind of turbulence
that had affected emerging markets in the past and affecting the
industrial countries today.
The underlying theme behind all the proposals made by the committee is
the need to enhance inclusion, growth and stability by strengthening the
nancial & regulatory infrastructure. Some of the measures suggested by
the committee as 'small steps' are discussed hereunder:
Banking Sector Reforms 71
(1) The need of a new paradigm in nancial sector is to recognize that
efciency, innovation and value for money are as important for the
poor as it is for Indian Multinational companies and it will come
from deregulation, new entry and competition in banking space.
The committee is of the view that the role of the government is not to
take on the task that should be legitimately deregulated to the
Private Sector but to create an enabling environment by building
sound nancial infrastructure. It is strange that the committee has
attempted to equate deregulation of Telecom Sector with the
deregulation of nancial sector with a hope to reap similar benecial
results where rewards could be much more substantial. The
committee is exhibiting oblivion to the fact that in Telecom Sector
the experiment could be attempted as it did not involve the public
savings. The Banking Sector enjoys the condence of the people of
the country who have placed their hard earned savings with the
banks. It therefore becomes imperative for the banks specially the
Public Sector Banks that their funds are not deployed in vulnerable
and speculative sectors which constitute the larger nancial market
in the perception of the committee. The committee's observation
that in this dynamic environment we will need skilled Regulators
who encourage growth and innovation even while working harder to
contain risks has come to such a stage where we have the chairman
of the committee as a Super Regulator in his new role as Governor of
Reserve bank. The amount of attention hitherto paid to issues like
capital account convertibility, privatization etc., has led to
emergence of divergent views and lack of consensus in the country
on these issues and hence the committee is of the view that the steps
to achieve these ends must be slow & steady with more focus on
small steps to create the infrastructure and carry out the process.
The suggestion of the committee that the credit to SME sector could
be boosted enormously if the trade receivable claims they have on
large rms could be converted to electronic format, accepted by the
large rms and sold as Commercial Paper as is practiced in Mexico
and could be handled through National Securities Depository
Limited is quite similar to securitization of Sub-prime loans in the
US which triggered the nancial crisis infecting the entire world.

(2) The committee believes that the market and institutions do succumb
occasionally to excesses which is why the Regulators have to
vigilant, constantly nding the right balance between attenuating
risk taking and inhibiting growth wherein US clearly failed this

Banking Sector Reforms 72

time. It did not in the opinion of committee mean that the Regulator
cannot nd the right balance elsewhere and also the well functioning
competitive market can reduce vulnerability. The members of the
committee ought to have known that the Regulators like Monetary
Authority of Singapore are quite vigilant and hence do not permit
the banking institutions to take exposure in the rms whose native
country has the potential of facing vulnerability. The committee
also acknowledges that vulnerabilities may be building up in India
and the under-developed market and strict regulation on
participation are no guarantee that risks are contained; in fact they
may create additional sources of risks, a fore warning of which may
come from recent reports of substantial losses incurred by the rm
on currency bets. It is beyond comprehension if strict regulation is
not the guarantee for containing risks in the mist of vulnerabilities,
then what else is the remedy? The risks can be better contained by
strict regulations of the market and hence the committee falls short
in suggesting appropriate solutions.
(3) The foreign capital and open nancial markets are as destabilizing
and prone to crisis as poor governance, poor risk management,
Asset-Liability mismatches, inadequate disclosures, excessive
related party transactions and murky bankruptcy loss. The country
needs reforms to check and avert the crisis triggered by such factors.
The suggestions by the committee to open up India's debt/bond
market to foreign investors and release the investment of banking
institutions in debt/bond market constitutes a perfect recipe to not
only link but expose the well founded debt/bond market to global
vulnerabilities. The observation of the committee that our macro
economic framework needs to adjust more to a world of rapid
capital inows exposes them to the situations of recent outows of
foreign investment/capital which had a substantially destabilizing
effect on our currency and markets. The more helpless argument
advanced by the committee can be seen from its observation that it
will be impossible to control capital ows in either direction which
will create substantial uncertainty & volatility in the market and also
the real exchange rate which is the key factor in determining India's
competitiveness is inuenced by the factors such as productivity,
growth and demand-supply imbalances that are not changed by
Central bank's intervention against the Dollar. In this context the
committee felt that given that the real appreciation has to take place,
the country has the Hobson's choice of taking it as ination or an
exchange rate appreciation. The committee further suggests that the

Banking Sector Reforms 73

Central bank can keep the market guessing about which option it
will choose and it can hop between two options take ination or
exchange rate appreciation. But creating such confusion will have
adverse effects on the market. The ination leads to higher interest
rates which hurts the growth and in the opinion of the committee, the
RBI should therefore concentrate on checking ination and
intervening in currency markets only to limit excessive volatility.
The committee has shown ignorance about the possibility of
pursuing middle path wherein the ination and exchange rate
management both need to be given adequate attention instead of
treating them as Hobson's choice. The committee while suggesting
the Central bank to concentrate on checking ination as the poorer
sections are least hedged against ination, is undermining the fact
that India with a negative balance of payment largely on account of
crude oil import cost will end up paying more foreign exchange
which will lead to not only increasing the cost of imports but also
increasing the demand for foreign exchange with further resultant
rise in exchange rate and such a vicious cycle will have signicant
impact on ination. The focus of committee's discussion appears to
be only on country's competitiveness in international market
without any worry of domestic market competitiveness which offers
huge potential for real and service sector owing to huge
demographics. The committee argues that we should relieve
pressures from inows by becoming more liberal on outows. As a
counter measure, it has been suggested to encourage greater
outward investments by Provident Funds and Insurance companies
when inows are high as such diversication will make these funds
more stable. Hence the relevant constituencies need to be
persuaded as by thus restricting their investment options to domestic
government securities, they are generally limiting future returns and
possibly increasing risks. It does not make any great sense to
diversify across foreign government securities to offset foreign
inows into our government debt market with outows into foreign
government debt market without these forces driven into by RBI.
(4) The committee is of the view that strengthening, scal, nancial and
monetary institutions would reinforce each other for which the
committee prescribes principal elements of framework as under:
(a) Government's scal discipline is as essential adjunct to the
process of nancial reforms. Higher public decit nancing
soaks up capital and has serious consequences for macro
economic development and also for the nancial section.

Banking Sector Reforms 74

(b) With more exible exchange rate and more exible capital
account, scal policy has an important role to play as a short
term demand management pool.
(c) Disciplined scal policy lower levels of government decit
and declined ratio of public debt to GDP are necessary to free
up the monetary policy to focus on its key objective of price
(d) High budget decit put a question mark on effectiveness,
independence and credibility of monetary policy.

(5) Financial sector reforms also need to be accompanied by real sector

reforms such as building out infrastructure, reforming the labour
laws, improving the social safety net etc. The effects of the
proposals made by this committee will be magnied if they can
piggy-back on the real sector reforms.

Broadening Access to Finance

The committee has desired changes to the scheme of Financial Inclusion
by suggesting the following measures:
(1) Instead of seeing the issue primarily as expanding credit putting
cart before the horse, committee urges a refocus to seeing it as
expanding access to nancial services such as payment services,
saving products, insurance products, ination-protected pension
(2) Direct Benet Transfer of government programmes to SB accounts
of the poor to reduce leakage, help build savings histories with their
banks which will then open the door to credit to poor. The
committee therefore desired that 90% of household have access to
deposit account and to the payment system for smooth
implementation of various government schemes.
(3) Instead of forcing credit to the household and making them heavily
indebted, the focus should be on making them creditworthy so that
when opportunities & needs arise they have access to bank nance.
(4) To alter the emphasis somewhat from large-bank led, Public Sector
dominated, mandate-ridden branch expansion to focused strategy
for Financial Inclusion.
(5) The much needed efciency, innovation and value for money can
come from motivated nanciers who have a low cost structure and
thus see the poor as protable, have capacity to make quick
decisions and minimum paper work.

Banking Sector Reforms 75

The committee suggests changed organizational structure to foster such
deliveries of services to the poor. The committee seeks more liberal entry
to private well governed deposit taking small nance banks offsetting
their higher risks from being geographically focussed by requiring higher
capital Adequacy norms, strict prohibition norms on related parties'
transactions and lower concentration norms in the form of loan as a
percentage of capital that can be lent to one party etc. This suggestion
undermines the role of natural calamities like draught, oods,
earthquakes, cyclone, tsunami, cloud bursts etc., in certain areas on a
regular basis. The local area banks which could not sustain after
implementation of Narasimham Committee cannot be expected to
establish and sustain their business models despite stipulations of strict
supervision and monitoring coupled with prompt corrective action.
Though the committee recommends that these banks do not become the
public charge, it is inevitable to so happen due to the factors mentioned
above. In the era of advanced technology, the distance between the
customer and the bank is immaterial for a speedy decision making. Hence
the perception of the committee on this count is stale. The wishful
thinking of seeing the local area banks eventually grow into large banks is
completely untenable. The committee's observation that the failure of
even few small banks will not have systemic consequences unlike the
failure of large banks and hence we should experiment with licensing of
small banks is not only completely absurd but is also demonstrative of the
self inner contradiction as the same committee has elsewhere
recommended consolidation of banks to create large-sized bank. It must
be remembered that the small public savings of the customers constitute
the funding of the banking institution and failure is certainly going to hit
the customers who are not otherwise interested in systemic failure or
protection. Their loss of money is what would hurt them and not the
philosophy of the learned members of the committee.
The committee has recommended introduction of sale and purchase of
Priority Sector Lending Certicates (PSLCs) towards fulllment of
priority sector obligations of those banks that undershoot their targets.
The imposition of interest rate ceilings make priority sector lending
unprotable. Hence reluctance to lend to priority sector drives the poor to
money lenders. The committee is of the opinion that liberalizing the
interest rates while increasing the safeguards will help prevent
exploitation. The implication of meeting the priority sector lending targets
through the purchase of PSLCs as recommended by the committee will
lead to lop-sided growth of priority sector lending only in the rich
geographies thereby defeating the very purpose of the priority sector

Banking Sector Reforms 76

lending goals of equitable growth and development of hitherto neglected
sectors of the society. Other suggestions by the committee as to what
should be eligible for PSLCs and priority sector lending to the poor will be
based on average interest on loans and the estimated cost of lending is
impracticable apart from being prone to manipulations.
The committee has not visualized a situation where there are only buyers
of PSLC in the market without there being any sellers; when the
committee is of the view that the business of lending to priority sector is
unprotable, it is more likely that such situations may arise. The social
objectives cannot be price-tagged as attempted by the committee.
Leveling the Playing Field
The committee is of the view that the banks are favoured in certain ways
and disfavored in other ways; the competition should result in resources
bei9ng allocated efciently and the society get maximum benet out of its
productive resources. The interests of consuming masses may be
emphasized instead of privileged producers being protected. It states that
time has come to unwind the grand bargain underlying the treatment of
banks in India whereby the banks get access to low cost deposits of the
government in return for fullling certain social obligations such as
lending to the priority sector, meeting prudential norms (SLR) that also
have quasi-scal objective of funding the government requirements. In a
competitive market the committee suggests that the government pay
towards the social obligations more directly to the beneciaries. The
greatest source of uneven privileges stems from ownership but it is also a
fact that while the PSBs enjoy the benets, they also suffer constraints
with later increasingly dominating. What ultimately matters is that how
the ownership structure will affect the efciency with which nancial
services are delivered. Much of the PSBs are falling behind in their ability
to attract skilled people especially at the senior level and hence their
inability to take advantage of the new technology, motivate the employees
at lower level and also to innovate. Since all these abilities are needed in
the emerging areas of opportunity, PSB's risk management capabilities
being weaker could be destabilizing.
We are of the view that the ownership is important in developing
economies as it helps in carrying out the development agenda of the
government more smoothly. Sentiments of the people, public and political
opinion and views of the trade unions are important and hence cannot be
undermined. The issue of the ownership and consolidation of the banks
has been debated even in the Parliament and it was dropped. It is also
important to own the protable business when the government suffers
scal decit. The alternatives suggested by the committee like reducing

Banking Sector Reforms 77

government share-holding to 33% or the concept of holding company
structure to own the public sector banks or allowing large international
banks to swallow Indian PSBs aim at serving the larger interests of global
capitalist agenda without any reason or rhyme. Such attempts will also
make the banking a costly proposition. It is desirable to enhance the level
of the corporate governance and autonomy of the boards of the PSBs,
improve technology to reduce time and transaction costs, take them out of
CBI and CVC purview as the nature of the business is commercial and
decisions are taken in the prevailing circumstances. The nature of
commercial decision being discretionary is subjective to a great extent
and the decision takers are invariable booked on the basis of hindsight.
There urgent need to enhance the training capabilities and opportunities in
PSBs to avert frauds. It needs to be understood that bankers are not super
human beings to detect the fraudulent intentions of every fraudster.
Hundreds of frauds averted go unnoticed and one failure is used to ruin
and shatter the life and career of the ofcers. Rationalization
accountability policy is considered a single most important reform to
enhance the speed and efciency of PSBs. It is important to remember that
all the banks in private sector do not have the best levels of efciency and
even the new generation banks do not have exactly same levels of
competitive strength. The thought of privatization to bring about
efciency and competitiveness is thus misplaced.
The perception of the committee that PSBs are not able to attract the best
of the talents is far from the fact as elsewhere the committee itself
observes that PSBs have historical ability to attract talent and many
former ofcers of PSBs are holding high positions in Foreign and New
Generation Private Banks. The negative opinion expressed by the
committee can also be contrasted against the reality that even the
recruitment of Probationary Ofcers to ll up about 52000 vacancies in
the current year attracted more than 22,00,000 applications and the
selected candidates included a majority of Engineering Graduates & Post
Graduates, MBAs and possessing other higher and professional
qualications. There is also greater need to internalize the post of
Executive Directors and Chairman and Managing Directors to avoid
unhealthy practices pre and post selection apart from preventing the
cultural invasion causing de-motivation among the top supporting
management. Futility of dual control of the banks by the Government and
RBI was also emphasized by Narasimham Committee too. But there were
no takers then and there will be no takers even now. The Government may
probably be happy if RBI renounces its control on the banking system in
favour of the Government. Will RBI Governor experiment in this eld by

Banking Sector Reforms 78

sending some experts from RBI to strengthen the Government Control
After analyzing the relevant aspects of Narasimham and Raghuram Rajan
Committees' recommendations, we now proceed to respond to the issues
covered in RBI's Discussion Paper.
1. Small Banks Vs Large Banks (Mergers and Consolidation)
We have Regional Rural Banks and Urban Cooperative Banks at
local level to cater to the banking needs of the people. Under the new
liberalized branch licensing policy, the PSBs have opened large
number of branches in rural, urban and unbanked centres. With the
liberalization of branch licensing continuing and focus on nancial
inclusion further growing, we expect larger integration of rural
economy in the mainstream economy of the country. That is what a
developing economy needs. Raghuram Rajan Committee views the
Indian Banks as relatively small vis-a-vis the international banks
merely on the grounds that only one Indian Bank(SBI) nds a place
in top 100 global banks and that too at 80 place. There is need to
review such perception. The size of assets which is the basis of
ranking the banking institutions is measured in terms of value in US
Dollars. Here comes the role of exchange rates. If the currency of a
country is weakening against US Dollar, the valuation of assets of
the banks of the country will also deteriorate. That is what has been
happening to the ranking of Indian banks internationally. Four
Chinese Banks nding a place among top 30 banks is largely on
account of appreciation of their currency against US Dollar and not
because merger and consolidation in their banking sector. It is
important to understand that the size of the business of banking is
largely related to the size of economy of the country. In this context
the Raghuram Rajan committee itself observes that the size of
capital of 10 biggest Indian Banks to 10 biggest Indian Corporations
is not disproportionate to the ratio elsewhere in the world. This
ratio is 2.72 in India as against 2.45 in USA. As long as the banking
institutions in the country are capable of meeting the credit needs of
the economy, the size of the individual banks does not matter. There
are huge sanctioned but unavailed credit facilities in the Indian
banking system and it is a testimony to the capability of our Banks to
meet the credit needs. The consortium, multiple banking and loan-
syndication coupled with ECBs are adequately serving the purpose
to meet even larger credit needs of the corporate.
The thought to initiate any move to merge or consolidate Public
Sector Banks under such circumstances is unwise and aims to

Banking Sector Reforms 79

benet foreign banks through intended takeover of Indian Banks at a
later stage as envisaged by Raghuram Rajan Committee.
2. Universal Banking
Financial Sector in India till the advent of globalisation and nancial
sector reforms had Commercial Banks and also Development
Financial Institutions to meet the credit needs of different segments
of Industry. The Development Financial Institutions like IDBI,
ICICI, UTI etc., saw reverse mergers with their off-springs and
started universal banking which later on spread to Commercial
Banks too. It has created problems like liquidity, asset-liability
mismatch on one hand and scarcity of trained personnel to handle
long term/infrastructure nancing on the other. The job-rotation
policy, transfer policy etc. mandated by Ghosh Committee, CVC
and the Government even in the case of ofcers recruited in the
specialized functions have only added to the woes of the bank
managements in PSB. The awakening to have differentiated
licensing particularly for infrastructure nancing, wholesale
banking and retail banking seems to be a belated thought when
almost all the banks have exposure to infrastructure nancing/long
term project nancing. Segregation will pose serious problems,
which will need smart solutions. The differentiated licensing will
help improve quality of credit as standard of appraisal will improve.
3. Continuation Authorization
Commercial Banking is a sensitive sector as it involves nancial
intermediation. Dealing with public money calls for extra care. The
role of the Regulator is also important. The present level of
competition in Indian banking space seems to be quite adequate
where various categories of the banks enjoy a fair market share as
SBI group : 24%
Nationalized Banks : 46%
New Generation Private Banks : 15%
Old Private Banks : 7%
Foreign Banks : 8%
In such an environment there is no pressing need to allow licensing of
new players either in the private sector or in foreign sector. The entry
of foreign banks either through the branch licensing route or through
the subsidiary licensing route may be evaluated on the reciprocal
basis. But there is hardly any scope to permit more banks in private
sector. The licensing in any case must be 'block licensing' and not

Banking Sector Reforms 80

'tap licensing' whenever there is a need to expand the sector on
merits and in changed scenario. The mismanagement and
consequent disappearance of Global Trust Bank, Times Bank,
Centurian Bank, Bank of Rajasthan, Lord Krishna Bank etc., from
the Indian Banking space must be taken as a lesson before granting
new licenses.
4. Conversion of UCBs into Commercial Banks
The cooperative sector bank failures have been very common
phenomenon in different parts of the country. In many cases the
PSBs were directed to rescue the depositors by taking over the failed
or failing cooperative banks. It would be worthwhile to explore the
possibilities of take-over of UCBs by PSBs and free them from the
local political interference and protect the public savings. The
transfer of technology in such an eventuality will also improve the
levels of efciency of the branches and bring down the cost of
5. Presence of Foreign Banks in India & Indian Banks presence
The number of foreign banks having their presence in India is more
than the number of public sector banks or private sector banks
individually operating in the country. Hence there is no strong case
for permitting liberal entry of more foreign banks into Indian
banking space. It is however felt that as a global players India may
adopt a balanced and reciprocal approach in deciding on this issue.
Similarly the Indian Banks may be encouraged to expand overseas
either by opening branches or by adoption of subsidiary route
including joint ventures as done by three PSBs by incorporating
India International Bank, Malaysia a couple of years ago.
6. Government Ownership
RBI in its Discussion Paper has desired an optimal ownership mix in
the banking sector to promote a balance between efciency, equity
and nancial stability while observing that there is a better pay off in
enabling PSBs to improve their performance. Simultaneous growth
of Private Sector banks will instill a fair amount of competition in
the banking sector. The argument of reduction in scal burden on
account of recapitalization of PSBs does not sound logical as the
government collects much more amount in the form of aggregate
dividend from PSBs. If the PSBs are relieved of political and
bureaucratic interference and larger autonomy is allowed to their
Boards, the protability of PSBs will increase. It will eventually

Banking Sector Reforms 81

bring down the demand for recapitalization by PSBs. The strength
of PSBs with Government ownership was widely acknowledged by
the then RBI Governor and the Finance Minister on the oor of the
Parliament for withstanding the economic crisis of 2008 and thus
remaining unscathed. The options from the menu of choices such as
non-voting equity shares or differential voting equity shares or
adopting holding company structure or diluting government stake in
PSBs are unwarranted tinkering with the well settled capital
structure of PSBs.
7. Indicative Reorientation of the Banking Structure
The 4-Tier banking structure suggested by Narasimham Committee
and also by Raghuram Rajan Committee is an oft-repeated
prescription available in the market for last two decades. But there
are no takers for the same which is an indication of its futility in a
well established Indian Banking space. What is being suggested by
the Discussion Paper released by RBI is largely description of the
existing structure of banking in the country. Even today we have
Banks like State Bank of India, Bank of Baroda, Bank of India and
Indian Overseas Bank having presence in several global
geographies apart from their Pan India presence. The remaining
PSBs are having presence in India with little or no presence
internationally. They thus constitute the second Tier. The third Tier
may comprise NewGen Private Sector Banks leaving the Regional
Rural Banks to constitute the fourth Tier. It leaves us with Urban
Cooperative banks and Old Private Sector banks which are a good
case for nationalization or take-over by PSBs. Such a move will
save the Cooperative banks from interference by local politicians
and Old Private Sector banks from exploitation and intermittent
take-over bids by Interested Groups/ Private Business Houses. It
would be worth emphasizing that our Old Private Sector banks have
been serving the nation by functioning largely on the lines of Public
Sector Banks and have played a sterling role in upliftment of socially
neglected sectors of the society while achieving the priority sector
goals/ Financial Inclusion. Their contribution in nation building
needs to be recognized. They also have pan India presence. Their
nationalization or take-over by Public Sector Banks will help
maintain equilibrium in the banking space.

Banking Sector Reforms 82

Current Economic scenario and
challenges of the Banking Sector
- Dr. Victor Lewis Anthuwan, LIBA
(Excerpts of the speech made on 14th August 2013 on our 48th Foundation Day)
It is a great day for us. 14th August 1947 we made a tryst with destiny......
The Colonial era came to an end. The greatest man of our country had a
dream- the dream to build a Ram Rajya and to wipe out every tear from
every eye. As long as there is poverty, inequality and untouchability, we
can't remain quiet told Pandit Jawaharlal Nehru.
I want to greet you and thank you for remembering this day which is also
your Foundation Day. Today, let us ask few questions. Have we wiped out
every tear? Millions of houses have been built because of your signature,
but millions are still homeless. Millions received agriculture loans
because of you and green revolution was possible because of you. There
was a time when we imported wheat and other food items. Today we
export grain because of you.
You are not sitting in Mount Road, Chennai. Arunachal to Trivandram
Gauhati to Patiala you are spread out. Because of you Green Revolution
and export of grain became possible. Many large scale industries were
built with your assistance and through your SME loans millions of SMEs
benefited. Thanks to you for all the prosperity. I see your signature, your
vision and your sacrifice in all the developments.
I want you to be happy & blessed You deserve much more than what you
are getting.
Privatisation of Banks is on the anvil. They will entice Officers with
double the salary they are drawing now. They will ask them to take all
their HNW customers and the profile details of all the customers. After
one year, unachievable targets will be given and they will be sent out.
People have done that earlier and later became jobless. It is totally
unethical, nevertheless they do it.
Per employee business and per employee profit are often quoted and say
that Public Sector Banks are not efficient. SBI employees and other PSB
employees deal with backward, SC, ST and poor people. They sanction
thousands of loans to people of these categories. Comparison between
PSBs and private Banks and Indian Banks and foreign banks is wrong.
Compare the equals not the unequals. The service you are rendering is not
comparable. you require different norms for PSBs, SBI and private and
foreign Banks. You have social objectives, they do not have. We should
not compare these two. You are ten times more efficient than any one of
Banking Sector Reforms 83
It is 66 years since we have attained independence. From 1757, India was
looted by foreigners. For almost 200 years India was destroyed.
Agriculture was annihilated. East India Company converted community
farming into individual farming. Common property became private
property. Asiatic mode of production was destroyed. We have a glorious
past - 2 lakh years before people lived in India. We knew of Agriculture for
the past 9000 years. We had 36000 varieties of Paddy. In the 1st century
India was the richest and even in the 17th Century, India was the richest in
the region. 25% of world income was from India in 1700. The world was
afraid of India. .
We had the technology for Industrial development. 5 years back in a
Handloom weavers exhibition in Andhra Pradesh, a 6 yard Handloom
saree was given in a match box to a Minister. Dakka Muslin 20 yard - 3 ft x
1 yd breadth could be kept within your ring. Pyramids had Dakka Muslin.
The finest textile was from our country, Algebra, Numeral, Trignometry,
Zero etc. came from India. We were the leaders in Maths, Metallurgy and
many other sciences. Delhi Iron Pillar was installed 1400 years back. Till
now, it has not rusted. so we had people who knew the technology to
remove sulphur from iron. We were leaders in Medicine. 2600 years back
Charaka and Sushruta conducted cataract operation. Sushruta speaks
about plastic surgery. He gave a nose to a man by plastic surgery. We were
leaders in Astronomy. Aryabhatta knew that the earth goes around the Sun
in 365 days. He was wrong by a mere 15 sec only. Our literature and
philosophy are as good as the best in the world. Mahabharatha is greater
than many world epics. Thirukural lends advice to Kings and ordinary
But, by 1947, we were one of the poorest, 200 years of foreigners' rule
destroyed everything. Lord Mcalay said I have never seen such wealth,
and people are so good that no locks were seen at home and everybody is
healthy. Break their system, to do that - change the pattern of education.
They did it, so that we lost our leadership and became mere followers.
Mcalay's prophecy should go.
We have to change the education system. We had great leaders like Mr. C.
Subramaniam, who told that we were not provided the right kind of
education. He asked the government to provide Japanese model of
Education. Lala Lajpathi Roy was a Trade Union Leader who espoused
the causes of the workers and died because of Police brutality. He had a
great vision for the country. Thanks to their vision.
Last 66 years, thanks to our MPs, teachers and Banks, India has been
transformed. 11th five year plan had only 8% growth, China had 11 to
12%. In 1975, we had 9%, growth under Mrs. Indira. During 11th five
Banking Sector Reforms 84
year plan, we have proved 8%, growth is possible. If we grow at 8% we
can over take Japan in 2020. By 2025 we can become third richest in the
world. China 1, US 2, India 3. By 2050, we can become second richest, by
2060, we can over take China. India will be richest in the world. Do we
have the road map? Is it possible?
We have the largest number of children. youth is our asset. 70% of the
population is below 45, 50% below 25 and 30% below 15. In Other
countries aging is a problem. Next 50 years we will have the largest
number of youths. Give skills to them.
But what is happening? Education is commercialised, Commerce is
Vulgarised, Women are Commoditised and Politics Criminalised.
Everywhere in the world subsidised free education is available for their
citizens. What should be in Private is with the Government here. What
should be with Government is privatised. Education is in the hands of
business men. I thank the Association for running good schools. Invest in
your children, make youth physically strong, mentally sharp and morally
upright. Ambedkar worked 16 hours per day in London University.
In Europe, Saturday and Sunday they disappear from office and spend
time with family. We don't let them rest and we don't spend time with
them. We are sacrificing our youth to make them earn more money.
Students earn more than their teachers. They work 16 to 18 hours per day.
Physically they are not strong and morally they are not upright. But there
is no national debate on that. A morally upright society is needed to reach
our goals. But, everyday, we hear about scams which are sickening .
However, vast majority of the people of this country are good and honest
people. No corruption and no dowry should be the goal.
Transparency international, the global Civil Society Organisation leading
fight against corruption has placed India in the 88th rank. Sweden and
Norway stand in one and two. There is no corruption.
We require emotionally balanced youth. They cry and fight or they are
alone. A false sense of feeling is there. We have to pay attention to that. A
deep inferiority complex is building in the youth of the Country.
Spirituality should not be a mere ritual. In spirituality, all religions are
same. Teach the youth to start living for others-Husband for wife-both for
children and all for the society. In the Upanishads, a king says I am proud
of my kingdom. No beggar, no thief, no one drinks alcohol, no
gambling. We should strive for the ideal world.
As Trade Unions go beyond Branch Bank Save your nation. Pay attention
to the youth. Let us live for others.
'Indians are rascals, they are unfit for freedom', said Winston Churchil.
After victory in the 2nd world war in 1947 we got freedom from the
Banking Sector Reforms 85
Labour Party of Britain. We killed Gandhiji immediately after that.
Churchil said, that is why, I said they are not eligible for freedom We
have to prove him wrong. Children are to be taught values. You have a
role, and you can transform the country. You are a great leader and the
best forum that has 10 lakh employees in the Banking sector.
The growth of our economy today has come down from 8% to less than
5%. In 1950, the growth was 3.5%. During 1900-1947, the growth was
less than 1% per annum. Nowhere you have such a model banking system.
In 1975, the GDP growth was 5%; in 1980, 9%; in 1990, 6%; in 2000, 7%.
It was 8.9% in 2008. After that the mistakes of converting public sector to
private sector instead of encouraging entrepreneurship and inadequate
investment in infrastructure Govt. has brought our growth down.
We are de industrialising ourselves. We have 27% of National Income
from Industry, but from manufacturing it is 16% only. We have
marginalised Industry. More import of finished products takes place. We
export iron ore to China and import Iron products. By doing that, we are
exporting job, when we ourselves want it badly. We have imported
Rs. 1,200 cr. worth of apples in a year when the farmers of Himachal
Pradesh struggle by not knowing what to do with their apples. With US
and Australian apples, we have destroyed our farmers. We were exporting
grapes but now we are importing.
Vinayaga Chathurthi, gives opportunity for our artisans to get some
money by selling their idols. Now, we are importing them from China
and deny opportunities to our own artisans. Can't we make Vinayaga
statues? Importing crores worth of them. Statues of Saraswathi and Kali
were also imported for Durga Puja. Small artisans are in a loss today and
we have Balance of Payment crisis. 10 years back, we let Import of Gold.
Last year 950 tons worth more than 60 billion $ was imported i.e. the
cause for BOP crisis. Today we have imposed curb on import of Gold.
90% of the Gold is in lockers and bed rooms. Only 10% is in jewellery
market. This 90% of gold lying idle is enough as capital for
industrialisation. FDI comes to make profit. It will not make us rich. Last 2
years 22 billion $ was the outflow of foreign funds as royalty. FDI alone
will not solve our problems.
Origin of the 2008 Economic Crisis: Stock markets are vulnerable and
will continue to be volatile. Let us have a look at the World Economy. In
1860, there was progress and in 1870 there was a great Depression; in
1920 the economy did well and in 1929 there was depression; in 1970s
once again there was good growth and in 1980 there were troubles- in
1987 Banks failed. On an average, once in 6 years there is collapse,
because capitalist economy is not a planned economy.
Banking Sector Reforms 86
Alan Greenspan, the Secretary to the Treasury in US told 8000 small and
big Banks to go and lend money for investing in Shares. The share prices
went up. Many times this was repeated. Later he asked the Banks to lend
money for homes. The Interest rate went down from 6.5% to 1%. People
invested in big houses. Demand went up. 2nd loan and 3rd loan were
given for the same house up to 95% of the value. Loans called NINJA (No
Income, No Job Accounts) loans were given. Loans were given in 5
minutes. Then, he asked people to use credit cards and spend money.
People spend money using their credit cards and could not pay back.
Rating agencies increased the rating artificially. Managers and Chairmans
of Banks got huge commission. New assets called derivatives were
introduced. The Chief Executive Officers of the Banks encouraged these
loans. Soon the system collapsed, because people did not have the
repaying capacity. People handed over the keys of the houses to the Banks.
Banks could not realise the loan. Fannymae and Freddymac, two Banks
that extensively funded the Housing Sector collapsed. Lehman Brothers
which was a 180 years old bank also failed. AIG (American international
Group) the giant American Insurance Company also failed. Slowly more
than 1000 banks went down. The whole economy melted, People lost their
jobs and homes and slept in cars and streets in Florida.
We were not following that model because there was opposition from the
trade Unions. There was also opposition from the RBI Governor Y.V.
Reddy. Reddy was criticized for not following the American model. But
he did not relent. When he retired every country invited him. Universities
abroad wanted him to visit them. Nobel Laurette, Joseph Stiglitz stated
Had Venugopal Reddy been the Chairman of the US treasury, we would
not have got into trouble. But once again we are talking about reforming
Public Sector Banks, which will lead to only a collapse.
Now, let us see our foreign exchange position. There is a deficit of 200
billion dollar in our export import. Our foreign exchange reserve is 280
billion dollar. Next year we will have to repatriate 170 billion dollars.
This will lead to a crisis. What are we importing. Last one year we
imported Rs. 25000 crores worth Electronic goods. Can't we produce here
and create employment? We imported Rs.1000 crores worth Alcohol. We
imported Rs.1200 crores worth Apples. We imported gold worth 62
Billion $. We imported oil for 120 Billion $.
80 % of our oil is imported. We keep giving loans for cars. We don't have
good roads, we don't have good parking place but we have cars. What is
the return we get from these cars. We are creating a crisis. Can't we use
automobiles with alternative energy. Can't we stop import of gold?. Can't
we stop import of Alcohol?
Banking Sector Reforms 87
Foreign institutional investors play havoc in the securities market. The
market cannot be sustained with their presence. They will dump securities
which will lead to crises like it happened in Indonesia, Turkey and Italy.
Value of Rupee has gone down because of their intervention. This has lead
to further inflation. Price of petrol has gone up because of the fall in the
value of the Rupee. But it is the poor innocent Indians working in the Gulf
who contribute to the forex. They remit 60 Billion $ per year. There
savings is the largest.
Inflation will not come down. Our interest burden per annum is Rs.
3,40,000 crores. We don't have money for investment because we need to
service huge loans. When there is no investment, there can not be increase
in employment.
We have to come out with new ideas. We have to stop importing gold or
tax import of gold. We can collect the gold from the people and give them
bonds. Sell the gold in the international market. We can buy when it is
needed. Stop import of apple and other non essential items. Once we have
surplus, Rupee value will go up. Transport prices have to be reduced.
Everything will become cheaper. Today TATAs, Mittals and Ambani's are
investing outside. They should be asked to invest in India. Create more
industries in India. The Economy will grow. Infrastructure projects worth
more than 1 lakh crores are stalled. Developing infrastructure will create
employment. By having 2 ways lines for the Railways our transport
problem can be solved and reduce consumption of petrol. Switch over to
alternative technologies like solar which can be subsidised by the
Government and bring down the cost of Energy. Strengthen agriculture,
and small and medium enterprises. Only Banks can do it. Banks have a
deposit of more than 75 lakh crores. For what we lend is important. There
are 10 lakh employees. If every employee introduces one new depositor
and one new borrower ten crore accounts will be introduced in one year
and 40 crores in 4 years. Give loans for production and not for
speculation. In Japan, the Bank credit is twice that of the national income.
Let us abolish black money which is 30% of our national income i.e.
60,000 crores. Bring back 450 billion dollars lying in Swiss Banks. Let
CBI do it. Some researchers say that 1 trillion $ are lying with foreign
banks. Lend money for economic activities which will create
employment, wipe out poverty and liberate women. Work honestly and
with a purpose. We can change the country. We can become a model for
the world. You can do it.

Banking Sector Reforms 88

Charter of Demands - Highlights

(a) The Charter of Demands has been broadly divided into Six Parts -
(1) Salary Revision and allowances; (2) Perquisities, Allowances,
welfare facilities; (3) Issues relating to lady ofcers; (4)
Superannuation benets including those to be extended to retirees;
(5) Non Monetary issues like working hours, 5 days week etc; (6)
General Bilateral Relationshi

Part I : Salary Revision and Allowances :

(b) The Charter suggests that the present seven scales be reduced to 2
scales as follows:-
a. Scale I Manager Grade integration of the present scale I to IV;
b. Scale II Executive Grade Integration of Scale V,VI and VII
(c) It suggests that like Government servants, Grade Pay be introduced
for taking up higher responsibilities in the bank;
(d) DA neutralization should be increased from present 100% to 125%
and thus conversion factor be recalculated accordingly;
(e) DA should be revised on monthly basis depending on the monthly
indices released by Government;
(f) Demands that CPI (IW) for qe 30thSept 2012 at 4876 be taken for
the purpose of merger of DA for construction of scales;
(g) A mid review of scales be undertaken at the end of 2 years (i.e. on
30/04/2015) and DA merged on the lines adopted by Pay
(h) It is suggested that Profession Qualication Pay be introduced for
other qualications (in addition to CAIIB) like Business
Management, CISA, Treasury Management, Technology, MCA,
LLB, Risk, Audit, Costing, HR etc.
(i) FPP be defreezed and payments be made more liberal for FPP;
(j) HRA : Payments be made as per 6th Pay Commission on area wise
basis. In view of wide gap between leased amount and HRA in lieu
of housing accommodation, HRA should have correlation to
prevailing leased rentals. HRA on capital cost basis be based on
current market price of property and should be 200% of normal
HRA. Self house should be allowed to be leased;
(k) Ofciating allowance should be 10% of the last stage of the scale;
(l) There should be at least 20% increase of the Basic Pay and
Allowances on promotion from one Scale to other;

Banking Sector Reforms 89

(m) CCA should be between 15% and 20% depending on the area of
(n) Allowance of 20% of Basic Pay for rural postings;
(o) Closing allowance equal to 15 days of their salary once in 3 months;
(p) All ofcers should be eligible for travel by Air with Senior
Management allowed to travel by Executive Class;
(q) Annual increments should be sanctioned on 1st January / 1st July


(a) Post Allowance : 25% of Basic for Branch Managers and 20% to
other ofcers;
(b) Risk Allowance : Lending risk to all sanctioning authorities at all
grades; (No amount specied)
(c) Disturbed Area Allowance : 20% of Basic Pay
(d) Medical Reimbursement : Scope of family to be enlarged and
Annual Medical Aid to be enhanced (No amount specied)
(e) Hospitalization Charges : Actual expenditure be reimbursed and
more ailments and surgeries be included in the list for
(f) Leave Fare concession : All ofcers to be allowed by Air and senior
management by Executive Class. Encashment should be actual
expenditure he / she would have incurred had the ofcer traveled
actually by entitled class. No income tax on such encashment.
(g) Special Allowances : These should be revisited and other centres
and higher amount be paid; Hardship allowance be redened.
(h) ExGratia should be introduced and at least one month's gross salary
be paid to al
(i) Commercial Banking Allowance : As commercial banking
involves risks, ofcers should be paid Commercial Banking
Allownace like in RBI (central banking allowance

Part III : Issues concerning Lady Ofcers

(j) A separate transfer / placement policy should be designed for lady
ofcers and give choice of their place. Flexi time and exi place
concept be allowed for lady ofcers. Lady ofcers should be
accommodated at the place where their spouse is working;
(k) Creche facilities should be provided for lady ofcers;
(l) 3 months additional leave be allowed to ofcers over the age of 45
Banking Sector Reforms 90
(m) Paternity leave of 30 days on 2 occasions should be introduced;
(n) Scope of family be increased for LTC / HTC and medical facilities;

Part IV : Superannuation Benets

(o) Pension should also be allowed to be paid on the last pay drawn or
10 months average, whichever is benecial to the retiring ofcer;
(p) DA be converted as Basic Pension as and when the cost of living
index increases by about 50%.
(q) Upgradation of pension above 80 years of age should be made
(r) In respect of all earlier retirees, improve the present Basic Pension
as per mutual understanding
(s) Commutation : Should be revised to 40% and full pension restored
after 10 years;
(t) DA neutralization should be at par with serving ofcers;
(u) VRS should be available in the Pension rules also;
(v) Pension scheme should be extended to all those who have been
denied earlier on the basis of misinterpretation of the understanding
reached with IBA
(w) Additional serviceof 5 years be extended to all retirees;
(x) Family Pension should be at par with Govt and be at 30% of last
drawn pay. Be paid for 10 years or till 70th year of notional age of
the deceased;
(y) New Pension Scheme : Original pension should be paid even to
ofcers who have joined 01.04.2010;
(z) Gratuity be paid at rate of one month salary and allowances and
without any ceiling and exempted from payment of income tax;
(aa) PF should be at the rate of 12% of total salary and allowances.
Should be payable to all employees;
(bb) Encashment of Leave : Upto 360 days encashment be allowed to all
classes of retirees and exempted as to central government
(cc) Medical scheme for pensioners / retirees should be framed on the
lines available to EDs and CMDs
(dd) Welfare Activiites : Separate allocation be made for welfare of
pensioners and facilities like Holiday Home, clinics, transit house
be made eligible for pensioners also;
(ee) LFC / HTC facility : Extend the same to all retirees

Banking Sector Reforms 91

Part V: Non Monetary Issues Relating to Working Environment :

(ff) 5 Days Week : Banks should adopt 5 days week;

(gg) Working on any day beyond 7 hours, should be paid at double the
normal rate and
(hh) Ofcers required to work on weekly off days should be monetarily
compensated and allowed a weekly off also;
(ii) Leave should be made more exible
(jj) CL be increased to 15 and additional 10 days of Restricted holidays
be allowed to ofcers;
(kk) Ofcers be permitted to encash the entire leave on retirement
including sick leave and no ceililng be imposed for accumulation of
leave. The ofcer may be permitted totransfer leave to other
ofcers in case of medical purpose
(ll) Outsourcing : Work done on regular basis should not be outsourced

PART VI : General Bilateral Relationships :

Certain Industry level issues have to be discussed at IBA / Government
Level. Hence, there is a need to have structured forum at IBA /
Government for periodical discussions. Hence, there is a need to bring all
such issues/directives of the IBA and the Government before a structured
meeting and settle to avoid frequent agitation and industrial unrest in the
banking industry.
The Banking industry is in doldrums due to inadequacy of the workforce.
The lopsided policies and the conventional approach of the Government
and the Managements of the banks at the instance of the IBA and the
Ministry of Finance have created a big gap in the average age of the
various groups of employees in the banks. There were no recruitments
virtually for more than 2 decades and as a result, the age difference
between the old employee and the new employee is so wide that the
average age of the workforce is adversely affected.
A crash programme should be worked out to tackle this serious issue.
In view of shortage of manpower, the retirement age should be re-xed.
We have the following suggestions:-
Redene the voluntary retirement and re-x the minimum eligibility for
the purpose.

Banking Sector Reforms 92

The age of superannuation to be raised to 65 years for all ofcers.
The present adhoc system of withholding gratuity and harsh decision to
set off the gratuity amount towards loss caused etc., should be reviewed
keeping in view, the recent judicial pronouncements. In any case, there
should not be stoppage or denial of gratuity to the ofcers. No disciplinary
action should be initiated after superannuation.All Terminal benets
should be released pending disciplinary proceedings if bank fails to
complete the proceedings before superannuation as is being done in the
case of CBI cases being pending.
Present Ceiling of 3% of net prots to be increased to 5% of net prot
without any ceiling.
Suitable Life Cover should be taken for normal as well as accidental
In view of the increase in cost of construction of house and ats, we need
to have a comprehensive review of House Building Advance to ofcers by
suitably enhancing the limit to Rs.50 lacs at Simple rate of interest without
any slab. Since the Conveyance Loan has not been revised for long, we
need to enhance the Car Loan limit to Rs.10 Lacs and Two Wheeler Loan
limit to Rs.1 lac at Simple rate of interest without any slab. The repayment
of the above loans should be extended upto 75 years of age.
In view of All India transferability of ofcers, the Road tax on vehicles of
different States should be paid by the bank on inter-state transfers.
Those who were born on the 1st of a month to be retired on the last day of
the same month, and not the previous month.
The emoluments drawn by an Ofcer should be protected on his transfer
from one place to another.
The Banks should take the responsibility for shifting the personal effects
of the ofcers on transfer from one place to another. In the absence of such
facility, the Ofcers should be reimbursed the full expenditure on
certicate basis.
Banking Sector Reforms 93
To meet additional expenditure towards education of children, housing
etc., ofcers should be paid two months' salary to compensate incidental
expenses on transfer. In case of transfer outside the State, 3 months' salary
should be paid towards incidental expenses. In case of transfers to far off
centers and the places of inclement weather and living conditions, there
has to be high compensation as incidental expenditure on transfer.
All the allowances other than what have been covered in the earlier
chapters should be enhanced appropriately.
The branches coming under the above areas should be treated on par with
Metro Centres for all allowances and perquisites.
Special allowance as prevailing in Central Government/RBI for Ofcers
serving in these areas should be extended to Bank Ofcers.
I M M U N I T Y F R O M T R A N S F E R P O L I C Y, S P E C I A L
The Ofce-bearers of Associations should be extended immunity from
transfer/placement. The Central /State level ofce-bearers should be
given duty-off on par with workmen organizations. The facility is due for
The negotiations on cost of salary revision should be conned only for the
purpose of deciding the load factor in respect of Basic Pay and Dearness
The date of effect for implementation of the settlement on the basis of the
charter of demands should be from 1.11.2012.
The Ofcers' Organizations reserve the right to include, amend or alter the
demands, as made out in the Charter during the course of bilateral
All anomalies arising out of Salary Revision should be resolved
irrespective of the cost factor involved.
Long pending issues on regulated working hours, 5 days week and
standardization of retirement benets and improvement in
Compassionate Appointment Scheme should be discussed before
commencement of regular wage revision negotiations.
Banking Sector Reforms 94