A Long Story

The Crisis of Banking

Asis Ranjan Sengupta

Presently, public discourses are abuzz with the topic of the sordid state of State-run Banks, as usual, for all the failures of Economy and Policy as a whole, all Public sector enterprises, their management and workers are held liable. At this point, the State and the enterprises under it, are projected as entities, in mutual conflict of interest. Since 2014, the rosy promise of 'good days' nosedived, all the flights of anti Kashmir and anti Pakistan pseudo 'Nationalism' failed to take off, saffron cow communal agenda, failed in Delhi and Bihar in 2015 and 2016. The next fake war against black money, by the organised mass loot of Note Ban, paid dividend in UP polls, but GST wrong implementation, again proved counterproductive in Gujarat. The problem is, the job, for which they were brought in by multi-National Corporate houses, remained unfulfilled. So a new destructive drama of cleansing Banks is put on stage.

The war against corruption in Banks and cleansing Balance Sheets, are just another hoax, the biggest corrupt brigade, cannot eradicate it, nor their aim is to rescue the State-run Banks from the cesspool of unpaid or overdue debts, as most of the plunderers of public money, are active patrons of political parties, and the present ruling Party, is a major beneficiary. Then, all business enterprises bear the element of risk, for Manufacturer, the biggest challenge is the risk of production, keep pace with change of technology, for Traders, it is the risk of Marketing, with all its uncertainties are there. But with Banking and Insurance the risk factor is highest. The Banking in particular, is linked with National and International economy, its policy variations, market variations in an open market system, and this risk is in addition to the normal risk elements of other business. In a privatised and Globalised environment, it becomes all the more risk prone. Each and every decision from micro to macro levels thus becomes crucial. This all important risk management exercise, despite all precautions, may and necessarily might prove erroneous in later developments. But the issue is, as per risk management theory, whether the decision was "genuine" or "flawed", in time of taking.

The problems, that the Bankers are facing are multi-faceted, but, unfortunately, now an impression has been sought to be created in the Public domain, is that it is all about huge accumulation of unpaid, and almost irrecoverable debts burden, and tactfully, the very credibility of state run Banks, have been drawn into question, by those who run, or supposed to run the state machinery itself. The matter has been given a dramatic and dangerous turn, by the arranged and planned "absconding" of a number of big defaulters like Vijay Mallya, Neerav Modi and Mehul Choksi etc. Countrymen are so frustrated, that their nearly five decades long trust in the state-run Banks, in spite of all odds, is on the brink of collapse. They have been made to feel, cheated, defrauded by whom? none but the Management and officials / workmen of Banks. Now, it is clear, it is a well crafted conspiracy, the second or third Act of the Demonetisation or GST drama. How such misconcept could be spread? simply because, the people of India, have not heard about any serious crisis or threat to the credibility or rather stability of Bank or Insurance, for say last five decades. It was under well control of the Government, and no threat perception, unlike now, when the threat is coming from the ruling dispensation itself. But the question is, whether Banking and Insurance sector always enjoyed such stability and security, since the days of inception? If not, how and Why?

The Banking or Insurance, in the shape as people get them today, are all, like modern Education, Health care or communication like Railway or Telegraph, all imports of British regime. Money lending business, money transfer though Hundi, were there from time immemorial. But the institutional Banking or Insurance started in eighteenth, spread in nineteenth and early twentieth century. And the course was never smooth or healthy. Almost all, started and failed within a span of time, causing loss to all stake holders, and harming the economy. Uncertainty was the main feature of such business. It was always a story of rampant laundering, unwarranted risk taking, and greed. With that it was a saga of mismanagement. The Banks owned by the British people, only catered to their need. Under direct imperialist rule, there was no growth of National Bourgeois class here, only a few comprador 'Bania' class, who were also part of Nationalist freedom movement, led by elite class, and they had been venturing in this field. And the result was not encouraging. Meanwhile, the freedom aspirations of the long deprived and oppressed masses, were also growing. These financial enterprises, like the Government machinery, and Mills or Tea gardens, needed, literate, educated in English way, as helping hands for clerical jobs. Their aspirations, matched with those of Comprador Capitalists, in so far as the question of rights or space, were concerned. So the institutions of indigenous Banks or Insurance, their entrepreneurs, had something in common with the rising discontent of working class, despite difference of interest. And the growth of Banking, is to be studied in juxtaposition of these two opposite pulls.

Though the first locomotive chugged off from Bombay to Thane not before 1853, the first Bank namely Hindustan Bank, came up in the city of Calcutta, the then Capital of British India, as early as 1770, thereafter, in 1786, General Bank surfaced, and these were all by East India Company people. None survived long. Prince Dwarkanath Tagore, the first big Indian Zamindar cum Merchant, laid his hand, like Coal Mines, Shipping, in Banking also. And Union Bank of Bengal under his Directorship, perished soon. In 1881, Oudh Commercial Bank, commissioned in Oudh, United Province, was evidently the first Joint Stock Banking Company in history, it lasted somehow till 1958. The historic Great Depression of Europe, also hit India, as a British Colony, and prior to that nearly 600 tiny Banks, failed in Calcutta, Bombay, Madras etc. The Traders connected with East India Company, founded three Banks, Bank of Calcutta (1806), changed into Bank of Bengal in 1809, Bank of Bombay (1840), Bank of Madras (1846), all the three merged into Imperial Bank in 1921, under total British Management. So till the establishment of Reserve Bank of India in 1935, there were rampant mushrooming and vanishing of Banks.. In fact, the phrase "Bank Run" was enough to strike the panic button, in the lives of middle class, small traders, in the Cities, and Business centres. Insurance business also started in Calcutta in 1818, with Oriental Life Insurance, Bombay Mutual Life Insurance came up in 1870. In this sector too, a number of British and indigenous Traders practised hands, resulting in plunder of Public money, by non payment of claims, excessive premium rates, spurious agency, and sudden vanish. Such uncertainty continued till 1912, when Insurance Companies act and Provident Fund Societies Act, were passed. Amid all this turmoil Companies like Hindu Mutual, Bombay Mutual etc. survived. The oldest surviving insurance company in India, is National Insurance (1906). In Banking sector also, a number of indigenous Banks survived, and still continuing with changed management. Allahabad Bank (1865), Punjab National Bank (1894), Bank of India & Corporation Bank (1906), Indian Bank (1907), Bank of Baroda (1908), Canara Bank (1910), Central Bank (1918), are the precious survivors, through, depression, Independence, Partition, Nationalisation, and such other challenges and turmoil. All of them were enterprises of Comprador "Bania" class, who were close to or sympathetic to the upper class led Freedom movement. PNB, was started in Lahore, under the auspices of a number of such personalities, as Lala Lajpat Rai. Central Bank was known as first Bank with total indigenous Capital, and leadership. This aspiration of National Capitalist class, against the monopoly of White Management, was also matched by the similar aspirations of Woking Class suffering under century old deprivation and exploitation.

The Bank workers were exploited like anything. They had no respectable wage structure, fixed duty hours, job security, nothing. The unrest was growing. Though there were references of stray strikes and agitations, like the one in Bengal Bank in 1934. There was no different shape of the movement. The right to form Unions came to be recognised by Trade Union Act of 1926, but it had no industrial dispute raising power, more or less welfare bodies. In 1946, AIBEA (All India Bank Employees Association) was formed in this city of Calcutta, under the leadership of AITUC (All India Trade Union Congress). The first of its kind in India, and after the Independence, came the Industrial Disputes Act 1947. And that provided a weapon to raise issues relating Industrial relations. This development annoyed the private Banks management, and their repression grew, with that triggered workers resistance. In 1946 the National Bank workers in Bombay observed 36 days of strike. There was historic 45-day long strike in Imperial Bank in Calcutta (1946). Employees of Central Bank took part in 20 days strike in Calcutta and Dhaka (1948). Lloyds Bank employees had 26 days strike in 1948 in protest against inordinate termination of jobs of 11. In 1951, 49 days and 46 days of strike took place in PNB and Bank of India respectively. Each of these disputes, was taken to Courts for redressal. That gave rise to multiple accumulation of court cases in different courts across the country. The K C Sen Tribunal was instituted by the Government to resolve some of the disputes, but the Bank Management flatly refused to abide by them. Then to bring all cases in different parts of the country, under one Tribunal, Government of India, formed Sastry Tribunal in 1958/59, the recommendations and their implementation, again created regional anomalies, that is different wages and working conditions in different regions. To resolve this anomaly, again Desai Tribunal was commissioned in 1963/64, the awards, now were binding on all, uniformly everywhere. This improved the service conditions, and empowered the workers further. And the demand for Collective Bargain, on key issues, across the table was raised. As a result, first time in the History of Trade Union movement in India, the Bi Partite settlement between workers organisation and management, started from 1966. All this coupled with the formulation of Banking Companies Act in 1949 (later changed into Banking Regulation Act in 1966, to broaden the scope thereof), succeeded to bring discipline, put an end to industrial unrest, for the time being at least, and ensure consequent stability in the Industry. But all these positive developments, were not welcome by Bank Management, as it restricted their greed and compelled to honour workers' share in the organisation.

The situation with the Insurance sector, was a bit different. To rationalise the sector, Government of India, issued an ordnance, later regularised by act in Parliament, took over all 154 Indian, 16 non Indian Life Insurance Companies, with 75 Provident societies in 1956, to create a state monopoly, Life Insurance Corporation of India (LICI), till reopening Market after 1990. Similarly, in 1972, all the limping, fragmented General (non-life), insurance entities, were merged into four major companies, and absorbed by State. In Banking also the need of control was being felt, and in the regime of Morarji Desai, as Finance Minister (1959-62), RBI was entrusted with more power to exercise "social control" over privately owned Banks.

After the second World War, the devastated big capitalist powers of Europe, were recovering by exploiting the wealth of Asia and Europe, by new mode of monetary market imperialism, in place territorial occupation, commodity market expansion mode. Here some major entities in the third world decided to keep out of both first and second world lobby. This was known as Non Aligned Movement group. These erstwhile colonial countries like, Egypt, India, Indonesia, Malayasia, Yogoslavia, under the leadership of stalwarts like Nasser, Nehru, Soekarno, T A Rahaman, Marshal Tito, followed closed door protected economy. At that point of time, Russia, and China, were also strictly controlled and isolated economic powers. This controlled, restricted and protected system, needed total state control over modes of production. As there was no Industrial revolution or National Bourgeoiesie class in India, the growth needed "initial push" (Keynes), by public expenditure, but private Banks, could not serve that purpose. So the need for state control. and in 1969, after the formation of State Bank of India, which was created by taking over of troubled Imperial in 1956, and integration of eight Banks owned by the princely states, which were also ailing after the extinction of Princely States, all the major fourteen major Banks were Nationalised, to be followed by another six, ten years later. The intervening period, since Independence, was less affected by uncertainties, and crisis ridden Banks somehow came out by mergers and acquisitions. Thus were created, United Bank of India, United Commercial Bank or United Industrial Bank etc. And this direct state control of 1969, infused fresh blood in Indian Banking, and it witnessed mammoth growth in business, expansion of Branches, employment generation, weaker section uplift, so on. These Nationalised Banks in this two decades registered havoc growth in terms of business and contribution to National productivity. The private Banks, only catered to the need of their own class, so it was "class Banking". But the motto of state run Banks was to ensure Banking for the mass, so it was "Mass Banking". The need of the mass were given priority, that is why, key "hitherto neglected" sectors like, Agriculture, Small Transport Operators, Small Industry, Small Business, Retail Trade, with special emphasis on "Rural Lending" were designated as "Priority and Preferred Sectors". After the victory of Socialism in Russia and China, the sceptre of Communism haunted the rulers all over, so the concept of "Welfare State" was popular, giving a human face to the, ruthless usurpation of public wealth. The parallel Mccarthyism was also operating. This state controlled mechanism, uniquely, suited the purpose of Indian ruling class to hide their ugly faces. But every such endeavour in the history, like Feudalism, Bourgeoie capitalism, delivered limited benefit to the masses at least over a period. And this was no exception. To further expand the presence of Banks in remote rural areas, Regional Rural Banks were created in 1975. There can be no dispute about that, Certain lagging sectors, and the Agriculture sector particularly, saw an impressive growth, India gained food self sufficiency, effective Public Distribution System (PDS) in this way. Imports were strictly restricted, so the Export trade also was limited. This was a golden era of Indian Banks. There was no competition, no market uncertainty, no threat on stability, the Bureaucratic management and the patrons were all happy, as nothing was important except, mobilising deposits from the public by offering lucrative rates. The residual Deposits, after fulfilling the mandatory needs of Cash Reserve Ratio, Statutory Liquidity Ratio, and Food Credit, had to safely invested in Government Bonds, or in Public Sector undertakings, that's all. The problem of Bad debts were there, no doubt, but the resolution system was easy and the Audit norms were not that much stringent as of now. This history of artificial 'comfort zone' is necessary to understand the nature and character of present day "Crisis" and the "shocking" reaction in the public mind. This sudden development, was nothing sudden.

The problems of Banks are multi faced, and essentially interlinked with the National economy, but at present, it has been projected as if, the problem with Banks is mono dimensional, and not that Banks suffer from failures of economy, but economy is suffering from the failures of the Banks. The entire focus is singularly on Non Performing Assets, Bank's inability to recover them. This accumulation of bad debts are caused by defaults by the borrowers. That failure to repay may be caused either by conditions beyond the control of the Entrepreneur or by deliberate volition. In the later case, it is deemed to be 'wilful default'. First thing is, the crisis is caused by normal growth of NPA s, are not that much a matter of worry, but real cause of 'Worry' is the default of super big corporate houses. These huge unpaid loan burden takes heavy toll on the health of Nationalised Banks, as such defaults are mostly 'wilful. 'In cases of Vijay Mallya, the charge sheet submitted by investigating agencies, allege such, deliberate diversion of public funds, and Banks also declared it as wilful. Same thing is true about Neerav Modi or Mehul Choksy. Now what exactly this 'diversion' or 'usurpation' means? It will expose a dangerous nexus of global money laundering, taking advantage of open, liberalised system. Any data search will prove, that the accumulation of black money, skyrocketed only after the nineties, though it was there prior to that, but never to this proportion. And most of these money, is parked in overseas tax havens, in disguise. Take the case of Foreign trade, a section of importers or exporters, take the route of 'under invoicing 'in case of exports, and 'over invoicing 'in case of Imports. In this first case less forex comes in, and the second case, excess forex goes out. In both examples, the balance difference between the actual and the 'imvoice' value, is parked overseas. It is a favourite tool used by the Diamonds and gold ornament traders. But suppose, in case of Vijay Mallya and Kingfisher, the mode of operation is different. Here the funds are siphoned by various means, to some domestic 'shell companies', enlisted later in overseas stock markets. First, by insider trading, the shares are traded, and soon the original source company, is closed. This process is repeated, once or twice or more, after that, the shares are transacted in overseas markets, same open/close game repeated, over a time period, so that the source is untraceable, finally, it is parked in a tax haven, like Panama, Lichtenstein etc. with a new identity. These may also get entry to domestic share Market in the shape of P Notes (Participatory Notes), or as International Institutional investments (III) or as Foreign Portfolio Investment (FPI), or may be invested in some dubious channels globally. This entire complicated process of black money operation is known as "round Tripping". In case of Neerav, the Bank was cheated, maybe in connivance with a section of Bank officials, by misuse or abuse of Forex trade instrument like 'Letter of Undertaking'. His Loan turned Bad, all on a sudden, when Bank refused to 'accommodate' him with the facility, he had been enjoying, for how long not known. So, this is an international network, that trapped the National economy, and Banks are made 'hostage' in that vicious cycle.

That is why, most of the big Non Performing accounts are from 2008-9. That was the year, in which, the US economy, suffered a devastating set back, as a result of so-called 'sub prime' lending crisis. It needed recovery, and of course by intensifying, international plunder. That is why, crude prices came down, and more stringent IRAC application was initiated, to destroy Indian Banks, so that their Giant entities, like Lehman Bros. Goldman, or AIG may recover. And anyone may watch the development. As Indian Economy, and its' Banks or other Financial institutions are running into deep and deeper crisis, US Economy is reviving, Crude prices rising, Fed Rate also recovering, the call for Globalisation, is giving way to 'America First' or 'America for the Americans', raise the border walls etc.

Another curious development, was the abnormal rise in the total NPA figure, after 2015/16. It was observed that a gala festival, was storming to turn the, long ailing manufacturing or trading units, to be converted into Loss assets overnight. It appeared that for them, closing of business and to ditch the Bank Loan, was more profitable than running it? Why so strange development? One or two things are clear. Firstly, after the Note Ban, MSME (Micro, Small and Medium Enterprises), registered a significant growth of Non performing Accounts. The GST attack, added to the numbers of such Accounts in the SME (Small and Medium Enterprises) sector. But the mystery can be further unlocked by the operation of private 'Asset Reconstruction Companies'. At these ARCs were launched by Nationalised Banks, jointly or with private entities, to purchase Bad Assets from the Banks at a discounted price. This was one of the devised methods for liquidation of bad Loans. The Nationalised organisations, have to care for certain rules for fair practices. But, a number of private Banks, who have substantial foreign stakes, jumped upon this, as a life time opportunity. They need not care for, so much of fair practice or rules, and State run Banks are persuaded, indirectly to sell at a throw away price, the stressed assets to them, incurring substantial loss. As the Bankruptcy Code was launched and IBC, was framed in 2017 end. The secret understanding is, turn assets into stressed overnight, and put them in Bankruptcy process, let ARC purchase them. After the final liquidation, the same asset will be resold to the same entrepreneur, with a different identity (to avoid CIBIL detection) at a convenient price, and the same Private Bank will finance the same asset to the same defaulter, with a higher credit limit. Let us explain further. Suppose, there is one Loan account with a total limit of 100 Crore goes bad, ARC will purchase at a discount of say 70 crore, the Entrepreneur pleads bankruptcy, and no step to protect, now after settlement of bankruptcy procedure, the same asset is sold to the same person or persons at a price of say 80 crore, and Bank accommodates with a financial assistance of say 100 crores to create a new performing asset. Only care to be taken is the defaulters name/s will furnish in CIBIL (Central Information for Bank and Institutional Lending). To evade that, a new joint stock company, with a new identity has to be created. In this way, defaulters will be spared of any debt recovery liability. The ARC earns by doing just middle man business. The Private Bank gets a fresh loan asset. Not only that, the defaulters, in this way may also evade all, liabilities of employees Provident Fund or ESI dues. The whole burden of loss is on the State run Banks. This heinous operation is active behind the sudden spurt in Non Performing Assets in Nationalised Banks, and the hue and cry raised to discredit the Banks, its Workmen, and erode the very credibility of Banks, so as to destabilise the economy.

Very recently, another ridiculous idea of 'Bad Bank 'was floated, whereby the bad assets are sought to be parked in a 'Bad Bank 'and clean the Balance Sheet. The idea itself is 'Bad 'so far as it fails to explain, how the collected garbage in a single bin, would be recycled or cleaned thereafter, or who will be going to take care of that 'Bad' entity. Finally, 'The Financial Resolution and Deposit Insurance' (FRDI) bill has been placed in Parliament, and sent to select committee swiftly. If anything, the Government has no obligation to honour recommendations or observations of the said Select Committee, that is the experience in Air India case. Then, FRDI Bill is draconian, as it encroaches upon the Citizens' Charter.

Last, but not the least, is the role Workers' Unions, people saw, at the very outset, that Bank workers positive movements and sacrificing struggles, achieved a lot, not only in terms of financial benefits or assertion of Rights, but also contribution to the growth and development of Indian Banking, that had to be Nationalised ultimately, for stability and discipline. But the glorious role they played, is now almost a forgotten history. Till the nineties the Wages and facilities of Banks or Insurance was exemplary and source of others' envy. But thereafter the collective bargains grew weak, and now it is less than expectation of workforce. The Officers also are now Unionised, but these Unions are now suffering from, same Management Bureaucracy, arrogance, factionalism, and Leadership addiction or power feuds. Instead of fighting for the Workers cause, they are more busy, managing coterie, arranging favourable posting, and shielding the corrupt from retribution. The employees also, due to lack of proper political education, became more conscious about rights than duties to either the organisation or to the Union. The Union Leaders, are late in rising to the occasion, they should now organise fight against attack on the Industry, and protect customer interest, by vehemently opposing such draconian bills as FRDI. For this they must motivate the ground level workers, and establish good rapport with common public, as Government and its' pet media, are trying create a divide and promote mutual hatred, as they do in all fields. Only numerical strength cannot be the strength of a Union. When rogue borrowers are protected and Bank Workers and Officers are being criminalised in public, more tough resistance is required. Demoralised workforce are also demotivated, and are but non performing asset for both Union and Corporate Management. Unions and workers and officers must awake and arise, before it is too late.

The War against growing Non Performing assets, was first initiated by Dr Raghuram Rajan, the ex- RBI Governor. As a representative of World Bank, he first waged crusade against bad loans, by stressing the need of proper identification, and classification of assets in terms of income recognition, and provisioning for them. He first exposed the concealed skeleton of Banks. Under his stewardship, the slapping of SARFAESI, on Big defaulters gained momentum, and acquisition or sale of asset properties. But he created uneasiness for the new rulers from 2014, as he refused to make discrimination, and hung sale notice on assets of Bhusan Steel, as well as those of Ambani or Adani, uniformly and spared none. But that was not to be. So he had to leave, for that he was not enough 'Indian'. After his departure, they attacked the monetary system with Demonetisation mayhem, ruined the commercial tax system, by hasty, unplanned implementation of GST. Now in Banking, they were under obligation to save their Financers, who are also defaulters, be it 'wilful' or not, and also protect their loot booty. So the absconding drama, and hue and cry over Bank corruption, for disrupting Financial structure. These are the hallmark of "strong governance" and reversal of "policy paralysis". All this drama is destructive tactics to ruin the economy, and make it easy for the continental plunderers, to siphon national wealth to their benefit. These loot facilitators, have personal and narrow political gains, as sideline players.

Autumn Number 2018
Vol. 51, No.14 - 17, Oct 7 - Nov 3, 2018