India: from loans to credit since 4000 years and the existence banks for 2500 years

24 February by Eric Toussaint , Sushovan Dhar


The first credit in India dates back 4000 years. The existence of loans is proved to exist during the Vedic period, which is between 2000 and 1400 BC. The existence of banks in India dates back to 500 BC [1].

A treatise on the art of politics of ancient India, the Arthasastra (attributed to Kautilya), dating from the 4th or 3rd century BC, mentions the existence of creditors, lenders and interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
.

From the 12th century AD, banks developed all over India. Indian bankers issued bills of exchange called Hundis which were used for international trade [2]. And that was 2-3 centuries before the bankers in Western Europe issued bills of exchange.

According to the Western media, the first bank to be born on this planet was Italian. It was called Monte dei Paschi, founded in Siena in 1472. However, banks had existed in India for several centuries. W.E. Preston, member, Royal Commission on Indian Currency and Finance set up in 1926, observed “....it may be accepted that a system of banking that was eminently suited to India’s then requirements was in force in that country many centuries before the science of banking became an accomplished fact in England”. [3]

During the British rule over India from the mid-18th century to 1947, English capital dominated Indian banking system. Until independence, the entire banking system was private and poorly regulated.

The weak regulation was aggravated by the abolition of the unlimited liability of bankers. This development was imported from Western Europe. Indeed, capitalists in Europe and North America had obtained a favourable legislation. Until then, if the banks they owned went bankrupt, the courts could order the seizure of all assets to the extent of the amount of damage suffered. Immediately after the abolition of the unlimited liability of bankers, there was an increase in risk-taking and, as a result, an increase of bank failures.

The rural world and in particular the overwhelming majority of peasants had no access to banking services and they were handed over to usurers. Similarly, in the cities, artisans and small entrepreneurs did not have access to banking credit. From the 1900s onward, this led to the creation of credit cooperatives in both urban and rural areas which were hardly little affected by bankruptcies.

On the other hand, from 1913 to independence, there was an uninterrupted series of bank failures. 108 bankruptcies between 1913 and 1921, 215 bankruptcies between 1926 and 1935, 70 bankruptcies between 1936 and 1945.

Bank frauds and banking crises have been an integral part of the financial history of India under British rule. In 1913, John Maynard Keynes, after studying the state of the banking sector characterised “(the) country as dangerous for banks [4]. In fact, the scams in the Indian banking sector predate Keynes’ observation. The Presidency Bank of Bombay (PBB), set up by the British East India Company in 1840, was stable and prudently managed until the mid-1860s. It was at this time that the British began to rely heavily on the Bombay cotton markets, as supplies from the United States declined due to the civil war. As a result, many cotton companies emerged and banks began to sprout in Mumbai to meet the burgeoning demand for capital.

In this context, the PBB began to issue loans imprudently against shares in private companies and even on personal guarantees Guarantees Acts that provide a creditor with security in complement to the debtor’s commitment. A distinction is made between real guarantees (lien, pledge, mortgage, prior charge) and personal guarantees (surety, aval, letter of intent, independent guarantee). . Then, at the end of the US civil war, the euphoria in the Indian cotton market turned into panic. The previously stable bank quickly closed down [5]. A new Bank of Bombay was established immediately in 1868 since financial institutions were of course at the centre of the colonial project.

After independence in 1947, the country’s central bank Central Bank The establishment which in a given State is in charge of issuing bank notes and controlling the volume of currency and credit. In France, it is the Banque de France which assumes this role under the auspices of the European Central Bank (see ECB) while in the UK it is the Bank of England.

ECB : http://www.bankofengland.co.uk/Pages/home.aspx
called the Reserve Bank of India was transformed into a 100% state-owned institution. It was given wide powers to control banks, which remain entirely privately owned. Nevertheless, these supervisory powers proved clearly insufficient, as a large number of bankruptcies, no less than 361 between 1947 and 1955, continued to occur.

The RBI building in Chennai. Courtesy: BBJ Calcutta

Despite the nationalisation of the Imperial Bank [6] which led to the birth of the State Bank of India and the subsequent acquisition of eight banks controlled by the princely states [7] by the State Bank of India in 1959, the private banks abandoned the lower strata of the society as had been their practice during the colonial period. In rural areas, they lent to traders only. These traders, in turn, made financial advances to small rural producers, who had to repay at harvest time at lower than market prices, keeping them in poverty. Rural cooperatives were grossly underdeveloped and the overwhelming majority of farmers were handed over to traders and loan sharks.

 India’s public banking sector : the historical perspective

Since independence in 1947 to 1969, the Indian banking sector was largely dominated by private banks. This period was marked by numerous bank failures. In 1969, the then Prime Minister Indira Gandhi changed the course by strengthening state and public sector intervention in the economy (this led to a split with the right wing of her Congress party). In doing so, she sought to strengthen Indian capitalism and respond to certain popular demands. One of the measures taken was to nationalise fourteen banks in 1969. [8] Among other measures, it put an end to certain privileges given to princely states, inherited from the British period. The colonial rule allowed certain powers for the local rulers or the maharajahs.

In her own way, Indira Gandhi resorted to what the de Gaulle government had set up in France after the Second World War, known as the “Circuit du Trésor [9]. The Treasury Circuit was a mechanism set up by the French government, after the liberation from the axis forces, to finance itself. It should be remembered that the Bank of France and four major deposit banks, under pressure from the movement from below, had been nationalised in 1945-1946. The Treasury Circuit allowed the French government to borrow without resorting to the financial markets. Banks were obliged to buy a quantity of French sovereign securities at the price and interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate fixed in advance by the government. According to Benjamin Lemoine, this worked very well for more than thirty years and the amount of public debt was much lower than it became afterwards. It was only in the 1980s that this mechanism was completely abandoned as part of the neo-liberal offensive. Since the 1980s, France began to borrow at the financial markets from banks and other private financial companies.

The rules applied in India from 1969 onward are reminiscent of the Treasury Circuit applied in France at the same time but with even stricter provisions, something very positive.

India’s public banks had to place the equivalent of 20% of their assets with the central bank as a collateral Collateral Transferable assets or a guarantee serving as security against the repayment of a loan, should the borrower default. against the risk of bankruptcy. They had to devote 40% of their assets to public debt securities, gold or cash. The remaining 40% was to be distributed in the form of credits according to predefined criteria called priority sector lending, which accorded significant priority to farmers, artisans and small and medium-sized enterprises in particular.

India’s big industrial bourgeoisie adapted very well to the existence of a large public banking sector, as it enabled them to fund their major expansion projects enormously. This was the case of large groups such as Tata (iron and steel), Birla (textiles and metallurgy) and others. This turning point for Indira Gandhi was predicated on an international context where India strengthened its military, diplomatic and economic relations with the Soviet Union. The Soviet model influenced India to adopt a planning system for large investments which favoured heavy industry.

The nationalisation of banks and the adoption of a state interventionist policy in the economy were primarily aimed at the strengthening of Indian big capital. It was also interested in protectionist measures against foreign competition. The orientation taken by Indira Gandhi also favoured the acceleration of the green revolution in Indian agriculture, which had unfavourable, even drastic, consequences for an important part of the peasantry which became dependent on the big seed companies, especially foreign ones (Monsanto, Syngenta... all supported also by the Ford Foundation and the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

) [10].

In 1980, the government carried out a second wave of bank nationalisation: 6 banks were nationalised. [11]

From the mid-1980s, structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
policies began to be applied in India, as in the rest of the developing world. During a major balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. crisis that broke out in 1991, the government accelerated the implementation of structural reforms to deregulate the economy, increase foreign investment, privatise, reduce protectionist measures (by joining the World Trade Organisation WTO
World Trade Organisation
The WTO, founded on 1st January 1995, replaced the General Agreement on Trade and Tariffs (GATT). The main innovation is that the WTO enjoys the status of an international organization. Its role is to ensure that no member States adopt any kind of protectionism whatsoever, in order to accelerate the liberalization global trading and to facilitate the strategies of the multinationals. It has an international court (the Dispute Settlement Body) which judges any alleged violations of its founding text drawn up in Marrakesh.

as soon as it was launched in 1995). As a result of these reforms, the asset Asset Something belonging to an individual or a business that has value or the power to earn money (FT). The opposite of assets are liabilities, that is the part of the balance sheet reflecting a company’s resources (the capital contributed by the partners, provisions for contingencies and charges, as well as the outstanding debts). allocation requirements of banks were radically modified: the share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of assets placed as collateral with the central bank decreased from 20% to 4.5%, and the share of assets to be allocated to public debt securities, gold and cash decreased from 40% to 19.5%. Interest rates, previously set by the Reserve Bank of India, were liberalised.

Then, the banking sector was opened to private capital. Seven new private banks entered the market between 1994 and 2000. In addition, more than 20 foreign banks started to operate in India since 1994. As of March 2004, the new private sector banks and foreign banks held a combined share of almost 20% of total assets. To sum it up, lending and deposit interest rates have been deregulated (the only remaining regulated rate is the savings deposit rate); the regulatory liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. ratio has been lowered to 25%; prudential standards for banking capital have been set in line with Basel standards, i.e. lowered; accounting standards for provisions and non-performing assets have been strengthened; foreign banks have been given more freedom to enter the Indian market and existing banks have been allowed to open new branches; the lines between commercial banks (which focus on working capital) and development banks (which focus on long-term loans) have been blurred; new banks have been granted banking licences and mergers have been made possible.

The privatisation programme carried out under the aegis of neo-liberal reforms continues to gain ground with successive governments pushing it further. The current government initiatives speak of an outright sale of public sector banks to private capital. During the budget presentation in early February 2021, India’s finance minister announced the sale of two banks to the private sector. Although she did not name them in her 2021 budget speech, analysts pointed out that the Bank of Baroda (BoB) and the Punjab National Bank (PNB) are possible candidates for an early privatisation. Recently, the Reuters news agency, in an exclusive release, revealed the names of the four shortlisted banks: Bank of Maharashtra, Bank of India, Indian Overseas Bank and Central Bank of India. Two high ranking officials told Reuters - on condition of anonymity since the case is not yet public – that two of these banks will be selected for sale in the 2021/2022 fiscal year, which begins in April. The shortlist has not yet been released.

 The scandalous story of the banking crisis

The past century and a half has not been without its share of crises and controversies in the Indian banking sector. The Reserve Bank of India has tried to respond to all these crises by strengthening and adding regulations. Nevertheless, bank failures have continued in one form or another, even if at a much lesser degree. Even before the latest wave of crisis hitting banks like the Punjab National Bank, the Yes Bank and others, there were stock market scams in 1992 and 2001 due to fraudulent banking operations. Then there was the Indian Bank scam in 1996. Among the newly created banks in the 1990s, the Global Trust Bank played a major role in the 2001 stock market scam. Then there were the bad loan crises in the 1980s and 1990s.

All these failures, and the most recent ones, are somewhat confusing despite the strengthening of banking regulation over time. Indian banks are now governed by both international Basel standards and national regulations. The Reserve Bank of India which has extensive powers to inspect banks and intervene in their operations cannot absolve itself of responsibility.

Following the crises caused by the collapse of Lehman Brothers in 2008, India’s banking sector was hailed. Indian bankers, it was said, did not follow so-called “Western fraudulent practices” and settled for the essentials. This idea is now being questioned and the extra-willingness of the fascist government to speed up privatisation must be fought.

Next article: India: What should be the proposals against the new attempts to privatise the public sector banks?




Footnotes

[1Reserve Bank of India – Publications, https://www.rbi.org.in/scripts/publicationsview.aspx?id=10487

[2Hundis are the oldest form of credit instruments used as early as the 12th century AD. Deposits were accepted by certain local banks under the “khata putta” system. However, most native banks such as the Multanis and Marwaris did not accept deposits because they relied on their own

[3Indian Central Banking Enquiry Committee (1931), Chapter II page 11 cité dans Reserve Bank of India – Publications, https://www.rbi.org.in/scripts/publicationsview.aspx?id=10487

[4John Maynard Keynes, Indian Currency and Finance, Macmillan and Co. 1913, London, 1913.

[5Eric Toussaint succinctly described in the case of Egypt the debt crisis linked to the cotton boom at the time of the US civil war. See Debt as an instrument of the colonial conquest of Egypt https://www.cadtm.org/Debt-as-an-instrument-of-the

[6Initially, in accordance with its Royal Charter, the Imperial Bank served as the central bank for British India before the creation of the Reserve Bank of India in 1950.

[7The princely states were a stigma of British colonial domination, which in some territories had kept the maharajahs in power.

[8The list of 14 banks nationalised in 1969 : Central Bank of India, Bank of Maharashtra, Dena Bank, Punjab National Bank, Syndicate Bank, Canara Bank, Indian Bank, Indian Overseas Bank, Bank of Baroda, Union Bank, Allahabad Bank, United Bank of India, UCO Bank, Bank of India

[9See Benjamin Lemoine, L’ordre de la dette, Éditions La Découverte

[10See Éric Toussaint, Your Money or Your Life, etc. ; also see Vandana Shiva, The Violence of Green Revolution, etc.

[11The 6 banks nationalised in 1980 : Andhra Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce, Punjab and Sind Bank and Vijaya Bank

Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Debt System (Haymarket books, Chicago, 2019), Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. He was the scientific coordinator of the Greek Truth Commission on Public Debt from April 2015 to November 2015.

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