“The move will increase scope for large-scale malpractices”

The Manmohan Singh government's move to allow corporate houses to open banks will “completely overturn” the bank nationalisation policy of the Indira Gandhi regime, the Communist Party of India (Marxist) said on Sunday.

Referring to the draft guidelines unveiled on August 29 by the Reserve Bank of India for licensing of new banks in the private sector, party general secretary Prakash Karat said at a press conference here: “In the light of the global financial crisis sparked by the profligacy of banks and financial speculation in 2008, this is an irrational decision.”

The draft proposals would allow initial foreign shareholding in new private banks of up to 49 per cent, and the limit could be increased to 74 per cent after five years. “This will open the way for the entry of more foreign banks into India. Many of these foreign banks have been responsible for highly imprudent and speculative practices that led to the financial crisis in 2008,” the CPI(M) Polit Bureau said in a statement circulated at the press conference.

In contrast, the Indian banking sector, dominated by public sector banks, had robustly withstood the crisis. Yet, the government was trying to open up the banking sector and seeking to amend the provision of the Banking Regulation Act, which caps the voting rights on the bank boards at 10 per cent, the statement said.

Pointing out that the Finance Minister had made an announcement on new banking licences for private players in his 2010 budget, the statement expressed apprehension that industrial houses, if allowed to own banks, would corner the bulk of credit for their own businesses through connected lending.

The party said the opening up of the banking sector would make it impossible to assess risks and regulate banks and lead to further concentration of financial power and political influence. “It is for these reasons that many countries, including the United States, prohibit industrial houses from operating banks. South Korea prohibited industrial houses from promoting new banks following the financial crisis in 1997.”

The party said banks run by big businesses would increase the scope for large-scale financial malpractices, and recent scams involving big businesses highlighted the danger of financial swindle that would occur in such banks, which would deprive the people of their hard-earned savings held in deposits.

The public sector banks, the party said, boasted of the best record in complying with the priority sector lending norms and branch expansion in rural and semi-urban areas: 67 per cent of State Bank of India branches were located in rural and semi-urban areas. Moreover, the SBI now had nearly Rs.65,000 crore in reserves. The other public sector banks too had high reserves. This huge capital could be tapped to expand branches and ensure financial inclusion.

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