MERGER MANIA VII

BY S.SRINIVASAN PRESIDENT

NATIONAL UNION OF BANK EMPLOYEES

(NUBE)
INDIAN BANKS LONG WAY TO GO .

Inclusion and consolidation

Consolidation or inorganic growth is thought of as a way of graduating to a global size. The proposal is actually old. The Narasimham Committee II had suggested this in 1997. Although the Government has taken care to mention that every proposal to merge or take over has to emanate from the individual bank's board but has not advocated that it should be supported equally by the employees. Very recently, the government ahs was changing headlines each day having an eye on election 2014 announcing populist, adhoc measures. One such intuitive is t consolidating the banking industry. The idea of encouraging mergers among banks to create global sized' institutions sounds attractive but may not be the right way to boost capital adequacy. The merged entity's capital will be just sufficient to support the aggregate business. A merger does not necessarily free capital from either of the merging banks. Any of the existing PSBs is unlikely to have spare' capital. Moreover, there are fundamental objections to the merger route. The Finance Minister has advocated gradualism, preferring individual banks to decide. The RBI feels financial inclusion is a more important objective than bank consolidation. According to the latest RBI data, as of December-end 2011, public sector banks accounted for about 74 per cent of deposits and advances in the banking sector More recently, the government has been looking at consolidating the banking industry. The idea of encouraging mergers among banks to create global sized' institutions sounds attractive but may not be the right way to boost capital

adequacy. The merged entity's capital will be just sufficient to support the aggregate business. A merger does not necessarily free capital from either of the merging banks. Any of the existing PSBs is unlikely to have spare' capital. Moreover, there are fundamental objections to the merger route. The Finance Minister has advocated gradualism, preferring individual banks to decide. The RBI feels financial inclusion is a more important objective than bank consolidation. The two main motives for mergers and acquisitions (consolidation) are the rationalization of costs and the diversification of growth through closure of branches and rationalization in the branch banking system which only accentuates further sectoral and regional imbalances, thus defeating the objective expansion of financial inclusion widely talked about..Hence financial inclusion and consolidation are antithesis The number of people living on less than Rs60(less than 1.5 US$) in India is significantly greater than that of the entire population of US. From the social perspective this is humanitarian pandemic.

To repeat the basic objectives of Nationalistion of Banks in India.are To provide banking services in previously unbanked and underbanked rural areas. To promote substantial credit to specific activities including agriculture and cottage industries. To provide credit to certain disadvantaged groups and weaker sections of society. The analysis of the Distribution of commercial branches in India bank group wise and population group wise -2009 vindicates there is an uneven distribution of banking services in the country. Only public sector banks and RRBs , have huge presence in rural areas and the respective share of the Private Banks And Foreign Banks is a mere 6.4 % and 1.4% while presence in metro areas is 34.8% and 79.3% respectively as shown in Table A & B

A) Distribution of commercial branches in India bank group wise and population group wise -2009 @

Bank SBI & Associates Natioanlised Other public sector Old private New private Foreign RRB Non scheduled commercial banks ( local area banks ) Total

Numbe r 7 19 1 15 7 32 86 4

Rural (%) 34.5 34.2 9.9 18.0 6.4 1.4 76.8 25

Semi urban Urban ( %) (%) 30.2 19.0 22.1 19.8 33.3 26.2 1.4 18.2 45.5 22.6 34.6 28.8 32.6 18.0 4.4 29.5

Metro ( %) 16.3 21.1 35.7 19.9 34.8 79.3 0.6 Nil

Total 16260 39095 566 4701 4264 295 15144 44

171

39.6

23.8

19.4

17.2

80,369

Source: Report on Trend and Progress of Banking in India 2008-09 As on June 30, 2009. @: Population group wise classification of branches is based on 2001 Census. Note: 1. Number of branches data exclude administrative offices. 3. Figures in parentheses are percentage to the total in each group.

B) Credit coverage of adult population by region for March 2009 Region North North east East Central west South All india % 14.9 9.2 9.0 9.9 32.7 26.1 18.3

Source: Report on Trend and Progress of Banking in India 2008-09 Note: No. of Borrowal accounts is as per place of sanction as on 31st March 2009; Adult population estimate is on the basis of Census 2001 and assuming a growth rate of 1.3% (World Bank, World Development Report ) This bears testimony for their lackadaisical concern towards social banking and over emphasis on class banking. And yet the finance minster is advocating grating of more licenses to new private and foreign banks? But disregarding this trend the finance minister a reiterated again in the recent BANCON 2012 conference We have written to RBI recently urging them to proceed to finalize the guidelines and proceed to receive applications for new banking licences in anticipation of the amendment in the Banking Regulation Act, We hope that RBI will pick up the thread and finalize the guidelines and start receiving the applications, he added. Mr. Chidambaram also said that the power or the authority that RBI wants is already available under other provisions of the law and the central banks own regulations and guidelines for handing out new banking licences." A day after finance minister P. Chidambaram prodded the Reserve Bank of India (RBI) to speed up the process of licensing new banks, governor D. Subbarao said on Friday that the central bank would do so only after making sure that the groundwork is in place and all enabling conditions are met. The RBI chiefs remarks seemed to indicate a widening divide on policy between the finance ministry and the central bank, which have also differed over the timing of interest rate cuts to prop up sagging economic growth. We have been preparing for launching this process (of issuing new bank licences), but all the groundwork, all the enabling conditions for launching this work have to be fulfilled,Mr Subbarao told reporters in Pune soon after the BANCON 2012 conference RBI hasnt licensed any new banks since 2002. But FM once again reiterated he had asked RBI to finalize the guidelines for new bank licences and start accepting applications from potential new banks without waiting for an amendment of banking rules.

The RBI governors reluctance to toe the line of the finance ministry is the second instance in recent times of the central bank and the government diverging on critical policy issues this year In the second quarterly monetary policy review in October, governor of RBI kept policy rates unchanged, citing high inflation, although Chidambaram had been keen that the central bank pare its policy rate to prop up economic growth. In a bid to convince RBI about the governments serious intent to rein in the fiscal deficit, the finance minister laid down a five-year fiscal consolidation road map a day ahead of the monetary policy review. But the RBI governor was unmoved. While leaving interest rates unchanged, he cut the banks cash reserve ratio, or the portion of deposits that commercial banks need to keep with the central bank, and hinted at a rate cut only in January. Growth is as much a concern as inflation, a visibly upset FM said then. The government has to walk alone to face the challenge of growth. The RBI governor said inflation remains high, although the central bank is conscious about the economic slowdown. At 7.45%, inflation is certainly quite high,Mr. Subbarao told reporters, adding that the central bank is always on high alert on the inflation front. The passage of the amendments to the banking law has been one of the main preconditions of the central bank for handing out new bank licences to private sector companies. To push for early bank licences, the finance ministry is exploring if RBI can be empowered to supersede the boards through executive actions instead of amending the law. Experts opine that The shape and the form of the final policy on new bank licences calls for alignment of multiple stakeholders, regulators as well as economic interests. The finance ministry appears to be fast losing patience with the Reserve Bank of India on the issue of offering new bank licences to private sector players. It has asked RBI to finalize guidelines and initiate the process of inviting applications "without any further delay". In a letter addressed to RBI deputy governor Anand Sinha, financial services secretary D K Mittal said the government hopes to get the Banking Regulation Bill 2011 passed during the winter session. The letter pointed out that RBI doesn't need to wait till the bill is passed as under certain existing laws the banking

regulator has the powers to govern these entities. "In any case, if RBI issues the final guidelines, the process of granting a licence to a new private sector bank would take six months to a year, and in the meanwhile, the bill would be passed. Along with differences over interest rate cuts, the government and RBI have been at loggerheads over the issue of new bank licence RBI is painfully aware of the pitfalls in allowing industrial houses to open commercial banks, but the regulator will ensure that these entities conform with the rules, deputy governor Anand Sinha had said at an event organized by Mint in Pune in early October.2012 Does that mean that we also should not allow big houses to float banks? We will certainly take a chance, he had said. We are painfully aware of the pitfalls, but we will make sure that regulations are not subverted. RBI will ensure that banks floated by big business houses will be at an arms length from their subsidiaries through amendments in the Banking Regulation Act, Sinha had said at the seminar. RBI licensed Kotak Mahindra Bank Ltd and Yes Bank Ltd in 2002. In 1994, it opened the door for the first set of 10 new private banks, seeking to introduce greater competition in the sector. This time around, the objective is the expansion of banking services, or so-called financial inclusion. About 40% of Indias adult population does not have access to banking services as yet. The stand of RBI as per the status and esteem it holds in the international level as prudent regulator of having warded off the threat of the global financial crisis is as sound as its other poicy dciisons in the interest of the nation. TheRBI unlike the ruling government does not harness election 2014 populist agendas. The RBI is correct when it states financial inclusion is a more important objective than bank consolidation. In support of the stand taken by RBI in granting new licenses to new private and foreign (which they do not deserve if one grimaces data in table A) banks we adduce further data Of the total 611 districts in the country, 375 districts are under-banked. The total districts include 82 districts of the North-Eastern Region of which 54 districts are under-banked. The under-banked district is the district where the Average Population per Branch Office (APPBO) is more than the national average. There is a need for banks to open branches at these locations and establishing

connectivity with the core banking solution.( Satellite Connectivity to facilitate penetration of banking services Need for financial incentives to banks: Discussion Paper of RBI) The achievement of financial inclusion is directly proportional to the demographic penetration of bank branches. As cited by Dr K. C. Chakrabarty, Deputy Governor,Reserve Bank of India, although the financial penetration indicators of India have improved over the years there is still much scope for improvement when compared to OECD economies as shown in Table B

B) Penetration of banks in India

Indicators Branches per 100,000 people ATM per 100,000 people Deposit per 1000people Loans per 1000 people Branches per 100sq. kms. 2005 6.33 1.63 432.11 71.42 22.99 2009 6.33 4.3 467.35 89.03 26 OECD Benchmark 10-69 47-167 976-1671 248.513 1-159

Soruce: The World Bank 2010. Getting Finance in South Asia Trend and Progress of Banking in India 2008-09, Basic Statistical Returns of SCBs in India. Note: The Benchmark Indicator ranges are for selected high-income OECD member countries (Australia, Canada, France, Germany, Italy, Japan, the Republic of Korea, New Zealand and the United States).
In his view, the efficiency of the banks has shown limited improvement indicating that the cost of low value transactions has not reduced.. Business from urban and big city areas accounts for more than 75% of thebanks business and has been growing over the years. The size of deposits and advances per account has also increased significantly indicating that the increase in usiness is not due to the acquisition of additional customers at the bottom of the pyramid. The intermediation costs of banks in India are still higher than those of developed banking markets. Further, as stated in the latest annual report4 of RBI, even in the 26 districts that were declared 100% financially included by the State Level Bankers Committees (SLBCs), actual financial inclusion was not achieved to the full extent in all the districts. An RBI-sponsored evaluation study indicated that

most of the accounts that were opened in these districts under the financial inclusion drive remained inoperative for various reasons and awareness with regard to no-frills accounts continued to be virtually non-existent in many districts. In another paper, Mrs Usha Thorat, then Deputy Governor, RBI admitted that while there has been positive growth in covering excluded households, a vast majority of the population remains un-served. The growth in the number of small credit (borrowal) accounts shows that: The number of such accounts of size `25,000 & below in the banking system rose from 36.8 million in 2004 to 39.2 million in 2009 an increase of 2.4 million (just 6.5%). The number of borrowers with credit accounts of less than `200,000 increased from 61.9 million in 2004 to 95.8 million in 2009 an increase of nearly 34 million (or 54.8%). It becomes apparent that for the coverage of those borrowing less than`200,000 to increase to at least 50% of the adult population in the next three years, the number of credit accounts would have to increase annually by at least 41.3%. The analysis of region-wise credit (borrowal) accounts in Table C shows an improvement in all regions. In terms of the number of such accounts relative to the adult population in the region, the western region showed signifi cant improvement from 10.2% (credit accounts/adult population) in 2004 to 32.7% in 2009. The southern region consolidated its coverage from 21.2% in 2004 to 26.1% in 2009. The coverage in other regions remained quite low, and yet this assumes that each borrowing adult has just ne account. The proportion is likely to be much lower considering that many individuals have multiple accounts.

C) Credit coverage of adult population by region for March 2009

Region North North east East Central west South All india % 14.9 9.2 9.0 9.9 32.7 26.1 18.3

Source: Report on Trend and Progress of Banking in India 2008-09

Note: No. of Borrowal accounts is as per place of sanction as on 31st March 2009; Adult population estimate is on the basis of Census 2001 and assuming a growth rate of 1.3% (World Bank, World Development Report )
In short building banking infrastructure reaching the nook and corner of the country, providing strength and stability to the system, mobilization of savings and an equitable distribution of bank credit with a degree of cross subsidization of interest rates are some of the avowed objectives of nationalization. But the gap between rhetoric and performance exists even today. The UNDESA data estimates that the number of India's poor was 33.6 million higher in 2009 than would have been the case if the growth rates of the years from 2004 to 2007 had been maintained. In 2009 alone, an estimated 13.6 million more people in India became poor or remained in poverty than would have been the case at 2008 growth rates. In other words, while a dip from the 8.8% growth in GDP averaged from 2004-05 to 2006-07 to the 6.7% estimated for 2008-09 may be nothing like the recession faced by the West, its human consequences for India were probably worse. The 2.1% decline in India's GDP growth rate has effectively translated into a 2.8% increase in the incidence of poverty. According to the UNDESA's World Economic Situation and Prospects 2010, 47 million more people globally became poor or remained in poverty in 2009 than would have been the case at 2008 growth rates, and 84 million more than would have poor at 2004-7 growth rates. Of these, 19 and 40 million respectively are in south Asia. The report uses the World Bank's definition of poverty, which is people living on less than $1.25 per day in 2005 Purchasing Power Parity (PPP) dollars. The estimates assume that there has been no change in income distribution. If inequality grew in India in 2009, the number of poor would be even higher than these projections. The UNDESA report attributes this increase in poverty to a combination of reduced household incomes, rising unemployment and pressure on public services. Job losses in India were primarily in export-oriented industries like textiles while employment levels in Indian firms catering to the domestic market were largely unaffected, the report says. Monetary and fiscal policy intervention gave Indian growth some resilience, while safety nets like India's National Rural Employment Guarantee Act (NREGA) helped to mitigate the effects of the slowdown, the report adds. Surveys conducted by the labour bureau did show big job losses through most of 2008, but a pick up by mid-2009," said economist and Planning Commission In addition to job losses, food price inflation is a major factor in a decline in poverty reduction in India, said leading Economist Amritya Sen. "It is not yet clear to what extent the spike in food prices is linked to the global financial situation, the poor monsoon or other factors", he added. The report is clear that the situation is picking up, but celebrations would be premature -- "global economic recovery is expected to remain sluggish, employment prospects will remain bleak". Job creation will lag output growth and

as social protection coverage is limited, working poverty levels will rise and be difficult to reverse, the report warns. There is no agreement yet on the number of poor people in India. The last official (National Sample Survey) household expenditure figures are for 2004-5 and the next round (2009-10) is yet to be completed. Further, the definition of poverty remains disputed, the Suresh Tendulkar committee's recommendation that India move away from calorific norms being the latest iteration. This committee pegged the number of poor in India at 408 million in 2005 These poor in India represent an opportunity for Public sector banks. Lending to poor, after nationalization is considered financially viable. Indian banking after nationalization has converted the poor to customers, at the same time empowering poor. It is verified that the current financial crisis in the US is not only due to complex financial engineering and poor regulatory frame work but primarily due to the quality of customers the banking had picked. Hence it is imperative PSBs evolve alternate models of credit evaluation, contract enforcement and build trust among the rural and urban poor. . The micro credit and Self help groups (SHG) movements as per above data analysis are in its infancy in India, but are gathering force. More innovation in the form of business facilitators, and correspondents will be needed for banks to increase their outreach for banks to ensure financial inclusion. New entrants to the banking system need household at their door step. The economy is presently in a phase of extant economic activities as well as creation of new activities. Corporate profitability and consumer incomes are increasing rapidly riding on the growth momentum. All these developments suggest that the demand for financial services both for savings as well as production purposes will be greater than has been in the past and there will be many new entrants in the need of financial services who have so far not been served. As the poverty levels decline and household have greater level of discretionary incomes, they will be first time financial savers. They will therefore need to have easy access to formal financial systems to get into the banking habit. PSBs will need to innovate and devise newer methods of including such customers from the rural areas and urban slums into their fold. Here the importance of no frills account and expanding the range of identity documents that is acceptable to open an account without sacrificing objectivity of the process can never be over emphasized. Banks will need to go to their customers, rather than other way round.

To conclude we wish to stress that with the higher economic growth the role of banking sector is poised to increase the financing pattern of economic activities within the country, to meet, the growing credit demands, banks need to mobilize resources from a wider deposit base and extend credit to activities which are so far not financed by the banks. The trend of increasing commercialization in agriculture, and focus of government of National Rural Employment Guarantee Schemes (NREG) and rural activities should generate greener pastures and public sector banks should examine the benefits of increasing penetration there in. Financial inclusion will strengthen financial deepening and provide resources to the banks to expand credit delivery. Thus financial inclusion, helps to accelerate economic growth further and achieve the avowed objectives of nationalization in letter and spirit. Financial inclusion and mergers are mutually exclusive concepts. Hence Mergers not a solution

Conclusion
Even as the economic theories that the West trusted till the crisis in 2008 are being re-written by it, the current Indian reforms are based on the obsolete economic ideas of the pre-crisis West. Tectonic changes have taken place in the economic thinking of West, including the United States, since the US-led global meltdown in 2008. Here are a few examples. Big banks, once seen as the cynosure, are now feared as too big to fail and too big to save; financial instruments like derivatives, then viewed as advanced, are now seen as destructive; the consumption-driven economic model celebrated prior to 2008 is now viewed as unsustainable; in the G20 meet in April 2010, France and Germany castigated the equity-driven free market financial model of the US as Anglo-Saxon and threatened to walk out the meet if the US did not agree to rule-changes. The Economist confessed in June 2010 that much of the macro economic theories developed in the last 30 years are useless at best or positively harmful at worst. Look at what these useless to harmful macro economic theories have done to the US and to the world at large. These theories drove the US to pursue market-based read stock-market driven financial model as more efficient, in place of a bank-based financial model even though neutral studies showed that a bank-based model was not less successful. The market-based idea postulated that stock market, not banks, could efficiently allocate finance. What then would banks do? Even big banks would cease to be lenders and become brokers and intermediaries earning fees. See how the theory worked in the United States. Policies were devised to cut interest rates to move people away from banks and into stocks. In 1990, the US interest rates were 9 per cent and only a quarter of US families had held stocks; in 2001 the US interest rate was cut to one per cent, forcing more than half US households move

to stocks. With their interest rated incomes crashing, pension, retirement and insurance funds shifted their huge investments from banks to stocks. According to Americas Investment Company Institute (ICI) Fact Book, in 1990, the taxexempted retirement funds held 42 per cent of their funds in bank deposits, which came down to 7 per cent in 2007; correspondingly, the share of stocks and mutual funds rose from 22 per cent to 48 per cent. As pension and retirement funds ploughed huge sums into stocks, the US stock indices roared, which, in turn, attracted more and more pension and retirement funds into stocks. Thus pension funds and stock indices acted as escalator for each other. According to ICI, the US pension and retirement funds exploded from $3.9 trillion in 1990 to $17.8 trillion in 2007; of which almost $6 trillion flooded the mutual funds. Out of it, a tsunami of $2.7 trillion money hit the stock market. The result: the US market capitalisation in 1990 which was $3 trillion, rose up by five times to over $15 trillion in 2008. This caused huge, unsustainable rise in stock prices generating asset appreciation or paper wealth. The artificial asset appreciation was certified as bankable equity to extend easy credit to consumers. Americans were encouraged to buy lavishly even as the US ran huge trade deficits with China. The high stock prices, which classical economists would have dreaded as an asset bubble, was regarded as real wealth effect by modern economists. Modern economists rightly saw commodity price rise as inflation and therefore wrong, but they celebrated asset price rise as wealth and prosperity! At least twice once in 1987 and later in 2000 huge asset bubbles nearly exploded the US stock markets. On both occasions, interest rates were cut, more credit was infused into markets to lift market sentiments. The strategy succeeded. The US Federal Reserve head, Alan Greenspan, who turned the market on both occasions, was regarded as the God of Money! He taught that producing paper money and making credit available to all by securitising it was at the core of economic policy. For that, he said, managing investor sentiments in the market which produces monies out of thin air, namely, asset prices rise was critical. The world mesmerised by him woke up in the 2008 crisis that showed that the God of Money was without clothes after all! Greenspan himself admitted to the US Congress on October 23, 2008 that the whole intellectual edifice (of market-based economics) has collapsed. However, he had already bankrupted US families. Just months before, in his book The Age of Turbulence (p385) he had brushed aside family savings as the virtue of underdeveloped and insecure people. The developed US people, he said, are a confident lot; therefore, they borrow beyond their income and spend. The Americans did it and did in the US first and later, the world itself. The US could do it for two reasons. One, their local currency, the US dollar, was also the global currency; so the United States could limitlessly borrow to fund its current deficit of $10 trillion so far and continue to borrow. Two, the US had become the unipolar power. Yet, the 2008 crisis has shown that the US (Anglo-Saxon)

financial capitalism is failing in the US itself. Yet the bank-based India still looks at the market-based US only for its reform agenda.

Take Japan, Germany, France and other Continental European nations. The GME Consulting study on the saving behaviour of West, citing researches on marketbased and bank-based economies, says, one of the fundamental differences continues to be the traditional division between the Anglo-Saxon market-based economies and the Continental bank-based model. Germany and other southern European countries remain heavily dominated by their banking sector. It also shows that the savings rate in bank-based economies is higher. According to Business Week (September 30, 2010), in the end of 2009, stocks constituted just 3.9 per cent of German household financial assets; life insurance 28 per cent and cash and bank deposits 38 per cent. Japan is identical. In a paper presented to the Bank of International Settlements in May 2009, Bank of Japan officials point out that Japanese households prefer bank deposits over risky financial assets when all the financial instruments are so well-developed and heavily traded in Japan unlike in other Asian markets. The bank-based Japan and Germany are as efficient as the market-based US, if not more. Indian households too prefer bank deposits, insurance and similar instruments. The bank deposits to gross domestic product (GDP) ratio in India in 1991 was 34 per cent; it has almost doubled to 67 per cent in 2011, according to the Economic Survey 2012 (p94). So, like in Japan and Germany, savers in India overwhelmingly prefer banks. Only some 5 per cent of Indian savings gets into stocks (Hindu Business Line, November 9, 2011). So India, with its overwhelmingly bank-based economic model, is closer to the bank-based Japan and Germany, and other Continental European nations. It is nowhere near the Anglo-Saxon United States. Yet the economic reforms of bank-based India tend to follow the market-based US economic theories, especially when the very theories threaten to become outdated in the US itself. Look at how things have changed even in India. In his previous tenure as Union finance minister P Chidambaram dreamt of reforming the banking sector by creating four or five large banks for India by merging all medium sized banks. Would he now repeat that idea when the West is itself afraid of big banks? Never. The prime minister told the Indian savers not to go to banks but to Dalal Street in Mumbai and buy stocks instead. The people of India, however, did not oblige him. The government cant reform culturally defined financial habits of the people. The West is rethinking and seriously introspecting about its economics that we tend to follow. On May 24-25, a continuing project titled Responder initiated by the Research Institute for Managing Sustainability (RIMAS), Vienna University

of Economics and Business, had organised a global meet on The Role of Household Savings and Debt in a Sustainable Economy. Its declared intent was to review the savings-drying and consumption-driven economic model of the West that was, till the 2008 meltdown, considered as the fast track growth model. Till 2008 all countries tended to adopt the United States model not thereafter. That is why the World Bank in its newsletter for May 2008 confessed that there is no economic or financial model that fits all and each country has to choose the model that suits its specifics. No nation can copy another nation. QED: Indian reform process has to be endogenous. Not exogenous. Yet, Indian reformers are habituated to search the waste paper baskets of the market-based US for its outdated ideas to reform the Indian economy. Are the reformers listening? Success of any economic reforms is to be judged on the touchstone of all positive Benefits to vast masses of our country where mounting unemployment and price rise of essential commodities constitute the worst curse of the nation. As per the statistical data published by Indian Statistical Organization (ISO), about 220 million people of our country still live below the povety line, whereas another large group of about 330 million populations are still well below the average international index of living with one dollar per day income criteria. Public Sector Banking is a tool in fighting against this menace whereas private banking would further escalate these problems. Public Sector Banks as strong national champions have played critical roles in saving the country from national disaster. Today the Indian Accounting Standards rank among the top five while the financial disclosures are among the top three in the world. The Government/Reserve Bank of India could not have asked for anything more. Any reforms of the banking system should be built on the institutional structure that has created it rather than seek to destroy it as is now being done. The banking industry is in need of true reforms in pursuit of true nationalization, but the strategy for it does not have to subvert the basic goals of development nor does it have to be forced at a pace with adhoc ,arbitrary moves of mergers , tinkering of banking regulation acts ,etc without any public debate and study that will result in liquidation of the institutional structure built up over decades of faith Parliament recently approved the Banking Laws (Amendment) Bill that would give RBI powers it had sought in relation to the boards of banks. A focus on inclusion would be most timely. It would coincide with the introduction of direct cash transfers. The scheme is billed as a game-changer for routing government payments and subsidies.

It could prove a game-changer for banks as well. Millions of accounts will have to be opened that carry the promise of huge float funds. Because it meshes economic priorities with the long-term commercial interests of banks, financial inclusion should now be the focus of banking reform. If this is accepted, we have a basis for dealing with licences for NPBs. Among non-banking finance companies, those that have a network of branches in the interior should have priority. As for industrial houses, the issue of licences must be clearly linked to the objective of financial inclusion. It is not enough to specify that at least 25% of branches should be in under-banked centres, as the present policy does. A bank set up by an industrial house can easily acquire a critical mass of deposits from its business entities and affiliates. It will not require a large branch network. It may set up a few branches in under-banked areas to comply with the regulatory norms, but it does not have to put them to use. In other words, it can grow without meeting the objective of inclusion on the liabilities side. If the objective of inclusion is to be met, there must be restrictions on the amount of deposits the bank can raise from other business entities in the house. Financial inclusion norms must be more stringent and must specify the number of accounts to be opened in under-banked centres, the volume of business per branch in under-banked areas, etc. In the absence of such norms, industrial houses would have an advantage over existing banks, especially PSBs, which have to bear the burden of inclusion. Thus, the policy on licensing NPBs must derive from the primary objective of banking reform. If the objective is to shrink the role of PSBs in the system, consolidation of PSBs along with the entry of new banks is the way to go.

If it is simply to drive down margins in banking, then we let industrial houses provide serious competition. However, if financial inclusion is to be the overriding objective, it is better to allow the dominance of PSBs in the system to continue while setting stiff norms for inclusion for new entrants Thus Inclusive growth though has been a priority of the Government of India (GoI) over the past decade. Progress towards this goal has been relatively limited so far and it is apparent that the governments effort to encourage the banking

system to promote Financial inclusion in an intensive manner needs a substantial impetus if it is to achieve adequate results. Neglecting financial inclusion and advocating consolidation with the main motive is closure many branches, down sizing of staff , tantamount to Social exclusion of services low income families. This will result in illiteracy, inhibition and poor physical access. It also limits awareness, ability to overcome prejudice about their bank-worthiness and enhances the transaction costs incurred these families for using the financial services available in the country and becomes breeding ground for extremists manipulations. The Indian State recognized the vital link between land and livelihood soon after independence and launched land reform measures which included three components: abolition of intermediaries such as zamindars, security of tenancy and a ceiling on agricultural holdings for distribution of the surplus to the landless. However, as time passed the commitment to land reform has weakened and it remains an unfinished agenda of governance. The poor have depended upon common property resources such as forests, pastures and water sources for the satisfaction of their basic survival needs. With the increasing tendency to see all such resources as sources of profit the poor are being deprived of whatever access they had to such resources In this situation it should not cause surprise that a large section of the people are angry and feel alienated from the polity and foundational causes lead to unrest, discontent and extremism. While the official policy documents recognize that there is a direct correlation between what is termed as extremism and poverty, or take note of the fact that the implementation of all development schemes is ineffective, or point to the deep relationship between tribals and forests, or that the tribals suffer unduly from displacement, the governments have in practice treated unrest merely as a law and order problem. It is necessary to change this mindset and bring about congruence between policy and implementation There can be no higher priority for national action and no higher claim on the national conscience than this These conclusions are equally valid in respect of the widespread rural violence that is being witnessed in India today.. To combat and avert the same, under democratic polity there is need for the government to mount programmes on a scale equal to the dimensions of the problem; To aim these programmes for high impact in the immediate future in order to close the gap between promise and performance; To undertake new initiatives and experiments that can change the system of failure and frustration that dominates and weakens our society. These programmes will require unprecedented levels of funding, planning and performance, which can undertaken without disturbing the regional, ethnic origins and equilibrium balance of present 20 public sector banks and the will to nationalize other private banks in pursuance of financial penetration and inclusion in the vast hinterlands of our great country to fulfill the above objectives. .

. There will be peace, harmony and social progress only if there is equity, justice and dignity for every one.

Our system is built on distrust in people: Trust in people must be substituted for trust in bureaucracy. Public servants must be servants of the people, not its masters Mr. Allen Octavian Hume, I.C.S., 1860 To be continued