India's dilemma over banking reforms
- 19 December 2012
- From the section Business
In a year in which growth was at its lowest in a decade, the Indian government is trying to introduce reforms to boost Asia's third-largest economy.
Parliament has passed a bill aimed at enticing foreign investments to the banking sector, and it is expected to be passed in the upper house as it is backed by the two biggest political parties.
But much-needed economic reforms are not always welcome and opponents to the measures range from communists to right-wing nationalists.
In August, more than 10,000 bank employees held a mass meeting in Mumbai to protest against an amendment to the banking laws.
The majority of India's banks are owned by the state, and the unions say the strike was a huge success.
CH Venkatachalam, general secretary of the All India Bank Employees Association, which helped spearhead the strikes, says his union is opposed to any reform.
"The world knows that India is still a developing economy and for this development we need a lot of resources," he says.
"At the moment, in all the banks in India, we have about $13bn (£8bn) of Indian people's rupees, and we want safety for this money."
Mr Venkatachalam says people have already lost money in the many private banks whose operations have been closed down by the central bank because of mismanagement.
"We are very concerned, these banks must must be government owned," he says.
Service before profit
Mr Venkatachalam adds: "60% of the population relies on agriculture and most of it is backward, so we need money for that.
"We also need to create more jobs and for industrial development we need money, so we want the banks to be in the government sector.
"What we need is not profit, what we need is access to banking services and access to credit."
But others say if India wants to compete on a global stage, it has to open up and liberalise its financial sector.
"As of now in the global arena, the contribution of Indian banks for global trade is only 1.5%," Mr Venkatachalam says.
But he does not think liberalisation is necessary.
"What is happening in the name of liberalisation is on the terms of investors coming into the country," he says. "We can open up our financial sector, but on our terms and conditions.
"We are trying to prevent any havoc which will take place by opening up India's economy.
"US banks are capital intensive, but in India we are people's-deposits intensive.
"If our banks are in difficulty then our people will be in difficulty and we cannot afford that in India."
But he adds: "If people can convince us that globalisation, more capital, more private sector, is a panacea for improving India's integration in the world economy, we shall consider the proposals."
Addressing customer needs
Former government advisor Prof Nitin Desai, from the Indian Council for Research on International Economic Relations, says the idea that only public sector banks can serve poor households does not stand scrutiny.
"Private banks have been doing rather well and they have raised the bar on the quality of customer service, including to poor households," he says.
"The banking crisis in the US arose because of a laxity in the regulatory system.
"The government has said it will not go ahead with any new licenses until the banking laws amendment bill is passed, and that bill enhances the Royal Bank of India's powers of regulation, including the power to supersede banks.
"The idea that somehow these banking reforms mean that we will have a Western-style free-wheeling banking system is not correct."
Prof Desai says India does not want to change the banking system, but simply to open the doors for new players.
What is really required, he says, is to change things for the customers.
"They need low-cost money transfer, the government is talking of using smart cards to deliver subsidies and the banking system has to step up to this," he says.