Money & Banking

The move to issue new banking licences is a retrograde step

Our Bureau Chennai | Updated on November 12, 2017



Given the Government's ambitious plan of financial inclusion, the proposal to issue new banking licences is not only ill-timed but unwarranted. Financial inclusion can only be done by public sector banks, and there is need to expand them.

Like most union leaders, Mr C. H. Venkatachalam, General Secretary of the All India Bank Employees Association (AIBEA), is not a person who minces words. On the other hand, unlike a typical trade union boss, Mr Venkatachalam does not express himself thumping his fist on the table. Gentle is the word that comes to the mind when he speaks, but at the same time he is no push-over.

The Indian banking industry today is on the cusp of a profile makeover, with several concurrent initiatives, such as recapitalisation, new licences and financial inclusion, happening.

Articulate and a man with strong views, Business Line engaged Mr Venkatachalam in a discussion on these issues. Excerpts from the conversation:

You must be happy over the Government recapitalising banks.

Certainly. We welcome the move in improving the capital base of banks. However, we would want banks to be capitalised from the budgetary allocation and not by receiving loans from the World Bank. It is estimated that the World Bank had provided Rs 15,000 crore loans for Indian banks last year.

It is a fallacy to believe that consolidated, big banks will be a solution to provide strong banks. This was seen during the financial crises, when big banks in the US went bust. In India, banking is deposit-based while in the US it is capital-based. As on April 30, 2010, the capital base of Indian banks was about Rs 18,000 crore but were handling deposits worth Rs 44 lakh crore .

What we need are strong banks that guarantee safety of deposits. In private banks the primary motive is profit and, therefore, they are willing to take major risks. Due to mismanagement, 10 private banks had to be merged with public sector banks in the last five years.

Why do you oppose new banking licences?

The move to issue new banking licences is a retrograde step. Given the past experience, private banks mobilise public funds devoid of any social contributions. Before nationalisation, banks promoted by industrial houses did not lend to agriculture, rural employment development or women empowerment, but used the deposits for their own expansion.

The situation is quite funny. On the one hand, they say they want to consolidate existing banks and create large banks. On the other, they want to give licences to create more banks.

Given the Government's ambitious plan of financial inclusion, new banking licences are not only ill-timed but unwarranted. Financial inclusion can only be done by public sector banks, and there is need to expand them.

What is AIBEA's stand on business correspondents employed for financial inclusion?

Employing business correspondents for financial inclusion is not just a way of privatising jobs but also exploitation of youth, who are paid pittance. It is the intermediaries employed by banks that make the money. Another dimension is that it is risky as there is no control — for instance, suppose one correspondent runs away with the money, the bank's image would get tarnished. Public sector banks should focus more on technology to extend their operations for financial inclusion, such as opening satellite branches or extension counters so that there is generation of organised employment.

The Khandelwal committee speaks of variable pay.

We strongly oppose the introduction of variable pay as a major component of wages and introduction of cost to company concept. This performance-based pay cannot be introduced in a service industry like banking as there is no scientific way to measure it. A branch in city would have more business compared with a branch in a rural location. Why should an employee working in the latter get paid less for no fault of his? If IAS officers are paid the same salary irrespective of their performance, why not bank employees?

Your views on the Malegam committee proposals.

The Malegam committee recommends a 24 per cent cap on the interest rate charged and 10 per cent margin for MFIs. I can't understand why it is should be considered under priority sector lending. MFIs lend to the weaker sections of society at 24 per cent when all the other loans are available at much lesser rate. If banks can operate with 3 per cent margin with all the branches, employees and overhead costs, why cannot MFIs operate at a lower margin?

Published on March 20, 2011

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