Mumbai: One of the consequences of financial and banking reforms is that the structural change it has wrought has substantially increased fragility and there are increased concerns about the trends in the banking policy over the last decade, according to the report of the Independent Commission on Banking and Financial Policies, released here on Tuesday.

Releasing the report, commissioned by the All-India Bank Officers' Confederation (AIBOC), S.P. Shukla, former Finance Secretary and former member, Planning Commission, and also Chairman of the Independent Commission, said, "There are concerns about the lack of social orientation, fragility of the banking system and issues of economic sovereignty and ownership."

Long-term objective

According to the report, an analysis of the outcome of the liberalisation strategy and the dangers involved in adapting it in the banking sector suggests that what is necessary is an alternative banking policy "tied in the final analysis to an alternative strategy of development. While the long-term objective of such an alternative would be to raise the rate of growth and make it more broad-based, equitable and inclusive, the immediate concern should be to restore social banking as one of the means to deal with the agrarian crisis and acute agrarian distress facing the country and the farming community." It must include elements such as ownership issues, consolidation, revival of development banking and promoting social banking.

P. Patnaik, Professor of Economics, Jawaharlal Nehru University, Delhi, said, "There is a tendency towards privatisation in banking and public sector banks are increasingly imitating private banks. To compete with them, they are increasingly moving away from their social obligation."

International experience suggests that raising the FDI cap, permitting FII investments in domestic banks and linking voting rights of private shareholders to their equity stake does not serve the objective of raising the rate of economic and industrial growth.

"Rather,'' the report said, "it enhances the vulnerability of the financial system by encouraging risky investments, increasing exposure to global capital and putting pressure on the Government to liberalise exchange rates and capital flows."

For strong regulation

Further, to restrict and reduce the fragility of the financial system it was necessary to separate the banks and the stock market and drop proposals such as permitting banks to trade in commodities exchanges and strongly regulate the access of domestic banks to global resources, which would also help improve monetary management.

Development banking was in fact an important component of an alternative policy. A renewed stress on the erstwhile role of development finance institutions (DFIs) would be possible only when the segmented financial market structure — wherein the DFIs service long-term loans and in return had access to concessionary finance from the Government — was restored.

The most urgent need was to increase credit provision to the rural areas for both agricultural and non-agricultural activities through a comprehensive and enduring strategy for credit delivery. "The Government says credit for agriculture will double in three years and banks without branch networks can operate through `agency banking,' but there are serious problems in this approach," said S. L. Shetty, Director, EPW Research Foundation. "If banks are pushed to double credit, they will push but of what quality is the credit and to whom. A significant part of accounts under agriculture are more than Rs.1 crore and to semi-urban areas."

The report suggested spreading the branch network by scheduled commercial banks and Regional Rural Banks (RRBs), adopting a multi-agency form for the rural network with well-defined roles for commercial banks, cooperative banks and RRBs with an appropriate monitoring system for social banking, and introducing a system of rewards and penalties for social banking performance.

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