Sujay Rao Mandavilli Privatization of Indian banks.pdf

Sujay Rao Mandavilli Privatization of Indian banks.pdf

1. Why India would be well-advised not to mindlessly
privatize its banks
Sujay Rao Mandavilli

Let us begin this article by tracing the history of banks. The history of banking is thought to have begun
with the first prototype banks that emerged in the ancient world, with merchants giving loans to
farmers often in the form of grains or life stock, and traders who transported goods across regions. This
was around four thousand years ago, in regions such as Assyria, India and Sumer. Several centuries later,
both in ancient Greece and during the Roman Empire, lenders gave loans, while accepting deposits and
performing the change of money. Most research carried out in the economies of ancient
China and India also show evidences of money lending, and transactions were often carried out in or
around temples, and other places of worship.
According to many scholars, the roots of modern banking began in medieval and Renaissance Italy,
particularly around the Italian cities of Florence, Venice and Genoa. The Bardi and Peruzzi families
dominated banking in fourteenth century Florence, gradually establishing branches in many other parts
of Europe, as the concept of banking spread widely across the region both within Italy and across
Europe. The most famous Italian bank was the Medici Bank, established by Giovanni Medici in
1397. The oldest bank still in existence is Banca Monte dei Paschi di Siena, which is headquartered
in Siena, Italy, and which has been operating continuously since the year 1472. Until the end of 2002,
the oldest bank still in operation was the Banco di Napoli headquartered in Naples, Italy, which had
been operating since 1463. Following the acquisition of the bank at the end of 2002 by the Sanpaolo
IMI group, in 2003 the bank changed its name to "Sanpaolo Banco di Napoli". In 2018, the Bank of
Napoli was officially closed and integrated into the "Intesa Sanpaolo"
Later, a number of important innovations took place in Amsterdam during the Dutch Republic in the
seventeenth century, and in London since the eighteenth century. London gradually became the
financial centre of much of the western world, though it has since been eclipsed by other cities in the
west, and later, Asia. Many banks collapsed during the Great Depression, and the banking system as
such was not bullet-proof reliable. During the second half of the twentieth century particularly, rapid
and impressive advances in telecommunications and computing caused major changes to banks'
operations and let banks dramatically increase in size and geographic spread. The 2008 financial
crisis also led to many bank failures, including some of the world's largest banks, and this unfortunate
event provoked much debate about bank regulation.
Let us now trace the history of banking in India. Seals were present in the Indus valley civilization, and
we do not know their use for certain, though hypotheses persist. Perhaps, they served administrative
and trading functions, though some scholars offer other explanations. In ancient India there are
evidences of loans from the Vedic period beginning around 1750 BCE. Later during the Maurya

2. dynasty beginning in the fourth century before Christ, an instrument called Adesha was in use, which
was an order on a banker desiring him to pay the money of the note to a third person. This corresponds
to of a bill of exchange in the manner that we understand it today. Merchants in Ancient India also
began to offer loans and advances to each other, and trade and commerce began to spread widely.
Modern banking in India originated in the middle of the eighteenth century, when India came under the
rule of the British East India Company. Among the nations first banks were the Bank of Hindustan, which
was established in 1770 and liquidated around the period 1829–32; and the General Bank of India,
established in 1786 but failed in 1791. The largest and the oldest bank which is still in existence India is
the State Bank of India . It originated as the Bank of Calcutta in 1806. In 1809, it was renamed as
the Bank of Bengal. This was one of the three banks founded by a presidency government, the other two
being the Bank of Bombay in 1840 and the Bank of Madras in 1843. The three banks were merged in
1921 to form the Imperial Bank of India, which upon India's independence, became the State Bank of
India in 1955 with the passage of the SBI Act. For many years, the presidency banks had acted as quasi-
central banks, as did their successors, until the Reserve Bank of India was established in 1935, under
the Reserve Bank of India Act, 1934. This became India’s central bank, and remained a largely
independent and autonomous entity and body.
Nationalization of banks refers to state ownership of banks in terms of equity. In 1960, the State Banks
of India was given control of eight state-associated banks under the State Bank of India (Subsidiary
Banks) Act, 1959. However the merger of these associated banks with State Bank of India went into
effect on 1 April 2017. On the twentieth of July 1969, the Government of India effected its first tranche
of nationalization by nationalizing fourteen major private banks; one of the big banks nationalized
was the Bank of India. In April 1980, six more private banks were nationalized. These nationalized banks
were the biggest in India in terms of both operations and lending. The nationalization of banks in
India was an epochal event that redefined the Indian banking landscape. Though it brought several
benefits, it also faces some criticisms. For one, nationalization of banks helped achieve India’s economic
goals post-independence, and helped it achieve rapid industrialization. It also helped banking penetrate
to smaller towns and rural regions, and made the banking system highly stable and free from nefarious
private activities. Other benefits of the nationalization of banks in India were enhanced social welfare,
reorientation of lending priorities, erosion of the power of private monopolies and greater financial
inclusion of the poor.
Criticisms of nationalization of banks have included allegations of sloth, bureaucracy, political
interference, and inefficiency. Some people argue that there was a lack of competition, though this has
mostly not been the case. Of late, there have been attempts to privatize Indian banks. The privatization
of banks in India involves reducing the government's majority stake in nationalized banks in order to
allow private investors greater control and ownership, as was announced in the Union Budget of 2021-
22 based on the earlier 1991 Indian economic reforms. The stated goals of privatization were the need
to improve efficiency, reduce the government's financial burden, foster healthy competition among
banks, and attract private investment into the banking sector in order to meet economic growth

3. needs. The zeal with which governments privatized banks appears to have reduced, and there appears
to be some form of introspection taking place not withstanding renewed efforts in 2025.
There is a wide variation of rules in different countries as far as the banking system is concerned. The US
banking system is generally seen to be weak in most areas, and the US is generally driven by
conservative right-wing ideology. The US banking system is a dual system with federal and state-
chartered institutions overseen by a range of regulatory bodies, led by the central bank, the Federal
Reserve System. The Federal Reserve conducts monetary policy, regulates banks, maintains financial
stability, and provides financial services to the government and other institutions. Key players include
the Federal Reserve Board of Governors, the twelve Federal Reserve Banks, and the Federal Open
Market Committee (FOMC). Deposit insurance, managed by the FDIC, protects consumer deposits, and
the structure includes a variety of institutions like commercial banks, credit unions, and savings banks.
Weaknesses in the US banking system include vulnerability to high-interest rates causing unrealized
losses on assets and loan defaults, exposure to uninsured depositor runs, risks from commercial real
estate loans, cybersecurity threats, regulatory burdens, and competition from FinTech. Additionally,
challenges include managing non-performing loans, the cost of legacy systems, potential for unethical
behavior, and the economic fallout from geopolitical tensions.
The American banking system significantly contributed to the Great Depression through widespread
bank failures, bank runs, and a contracting money supply, exacerbated by Federal Reserve policy that
failed to act as a lender of last resort. Over nine thousand banks closed between 1930 and 1933 which
was the peak period of the Great depression, leading to a massive loss of public deposits and creating a
vicious cycle of declining consumer spending and business investment due to the lack of available credit.
The lack of effective regulation in lending, coupled with a belief in maintaining the gold standard, led the
Fed to raise interest rates and reduce the money supply, worsening the deflationary spiral and the
economic collapse. Of late, the financial position of many Indian banks has improved considerably, and
customer service has also improved. We must take in the best aspects of other banking systems, not the
worst ones. India’s bank nationalization effects have provided many benefits to the banking public, and
to the economy. In summary, India should make its banking system stronger, not privatize banks
mindlessly. Of course, private banks can continue to operate under strict government regulation.