Slowly but steadily, the case for more private banks, preferably set up by business houses, is being built. Launched with great gusto by the Finance Minister whose ardent espousal got a very reluctant RBI under its former governor to prepare about guidelines, the case for an expansion of Indian banking has been acquiring increasing legitimacy in seminar halls and business conferences. Not too long ago, the chairman of the Prime Minister’s Economic Advisory Council, C. Rangarajan, a former governor of the RBI, suggested new bank licenses be made available ‘on tap’.

Now we have the President of FICCI, Naina Lal Kidwai asserting to this paper ( Business Line, September 25, 2013) the virtues of government scaling back its control of banks, and for more specialised and big banks to fund industry and enable financial inclusion.

Why the rush?

The rationale for such an eagerness for fresh bank licences and the entry of business houses into financial intermediation --- at a juncture when all around the world banks appear troubled, when Indian corporate houses, the drivers of Indian growth are not doing well, for reasons other than the shortage of capital --- may appear intriguing.

But this is India, where rationality and sense need not necessarily move hand in hand; un-torched by the financial crash of 2008 and its aftermath the Indian policymakers and middle class can afford to be sanguine about principles that were found to be severely wanting elsewhere.

So, there are some underlying elements to the discourse on new banks, elements that we adhere to either because we are gullible, or harbour a purposeful desire to tread the same path to disaster followed by countries we admire so much.

One, bank nationalisation has been a mistake, a failure or more charitably, an idea whose time is out of joint. This is evident in poor industrialisation and poorer financial inclusion. Second, government ownership has resulted in the loss of valuable national resources, public money, that is, to fund lazy and incompetent business practices. Despite being whittled down to 51 per cent, government ownership has turned the public sector bank into a plaything that reduces initiative and risk-taking --- in fact, turns it cross-eyed with conflicting objectives. So, India has a backward banking sector trailing global trends in financial innovation, size and business reach.

Backdoor nationalisation

All these arguments for would have been fine, if 2008 had not come along. For, what the failure of Lehmann Brothers and the domino effect all across the European and American system showed was the hollowness of precisely those assumptions underlying India’s current desire for a freer financial universe.

Take nationalisation, for instance: Banks, indeed the financial system that fervently espoused de-regulation and less-government tenets, had to fall back on public dole-outs routed through governments.

Perversely, the bail out of American Irish and British banks among others by their respective tax payers was actually grounded in the same logic that had justified India’s bank nationalisation --- banks are important for economic growth.

So the first and most important lesson we ought to learn from the 2008 crash is that even global banks know governments will not let them die, that tax payers will rescue them from their own greed.

Second, comforted by this thought banks can continue to innovate the way financial de-regulation of the 1980s allowed them to. That period witnessed the transformation of the traditional deposit-taking retail bank, solely guided by their responsibility to depositors, into “universal banks.”

bank to conglomerate

That transformation, with the removal in the US of the Glass Steagall Act that mandated Chinese walls, cleared the decks for a single-minded dedication to financial innovation pursuing super-profits. In the process, the financial institution now morphed into an entity with a life of its own.

Unlike the old German banks that underwrote industrialisation, modern banks or financial conglomerates only serve themselves.

It has taken investigations by several regulators in the US and UK and elsewhere almost four years to understand just how self-serving the institutions had become even with the funds handed them after the crash.

A little over a fortnight ago, America’s biggest bank, JP Morgan agreed to pay the UK regulator and several US regulators, including the US Fed, $920 million for the $6.2 billion trading scandal caused in the “London Whale” fraud of last year.

Last year, Britain’s biggest bank, HSBC was accused by the US Senate for abetting money laundering by drug cartels and gun runners; it agreed to the fine that was meagre compared with the business volumes that ran into billions of pounds. Ironically, HSBC had emerged unscathed from the financial crisis. That was not so with Britain’s second largest bank, Barclays that in 2012 was fined for manipulating LIBOR rates before the crash, as was UBS. Four other global banks are also under investigation by a raft of regulators, including US state-level attorney-generals. So far ,banks have paid criminal and statutory fines: as John Lanchester ruminates in his essay on troubled banks in The London Review of Books (Are We having fun Yet? July 3, 2013), LIBOR affects the entire financial system, and if someone can show they were harmed as a result of the rate manipulation, the claims could get more expensive for banks.

Not human greed but profit

The issue is not the venality of banks engaged in unfair or unsound practices as much as their underlying goal: to innovate and make money. They are their own rationale for existence; not as facilitators of credit for industry or inclusive growth. They are responsible only to themselves and their major shareholders. And if the too-big-to-fail conglomerates do teeter on the edge, governments will bail them out---with tax payers’ money.

The issue is below

International experience thus shows us a philosophy of banking at odds with the ones Indians have inherited and now berate. Global conglomerates, or universal banks are fired by the self-serving urge for super-profit making. They define their own reason for existence as financial empires untouched by the ‘real’ world or economy. De-regulation works best and lawmakers won’t let us fall.

That discourse is locked in a debate with the ponderous legacy of fiduciary responsibility, regulation and government ownership of banks.

No prizes for guessing which way the wind is blowing.

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