Nexus between Indian industrialists and banks comes a full circle..

History is both intriguing and refreshing. How things keep rhyming if not repeating is quite something.

There is a lot of discussion on rising NPAs in Indian banks and how some large corporates have openly defaulted as if nothing has happened. This has led to the allegation that banks and industray have been too close  for India’s comfort.

The problem has obviously been limited to public sector banks which itself is a question worth exploring. Capturing of banks by industry should have been much easier for private sector banks. Why should it be public sector banks which were ironically nationalised to fight this very issue that Indian industry controlled Indian banks?

Let us take a short snapshot of history of industrial organisation in India.

It so happened that most of Indian banking before nationalisation was in the hands of elite industries. Much of the Indian industry had organised itself in the form of managing agency. Managing Agency was a special form which came from British who came to India and realised there is a huge market but no industry. So they started manufacturing whatever they could with all powers rested in a body called managing agency. This agency owned and controlled all the businesses which came under the agency. It was common for agencies to be into unconnected businesses like cotton, jute, transport, shipping etc.

Very quickly, these agencies came onto own banks as well. After all a bank was needed to remit money back to England and also run the show. The money moved freely from one business to another using the bank. A bank was like any other department of the agency. The impact of managing agencies on banking was huge. So much so, one could not get a loan from a bank till it had signatures of assurances from a managing agency of repute.

Taking a cue Indian industry also organised itself like a managing agency. The Indian MAs of Bombay in particular were really powerful.

So by the time of independence, most Bombay and Calcutta based banks were owned or run by MAs. It also happens that Indian industialists were not not industrialists per se. Most were traders whi had made fortunes from trading and speculation. Lack of industry in India is not a recent phenomenon but runs much deeper. This was also one of the reasons why Polity ended up pushing industry to public sector as Indian industrialists were reluctant to take on the baton.

Coming back to banks, they followed the orders of their bosses (but obvious) and remained in big cities and lent mainly to the whos and who. This obviously irritated the political bosses who used this reason to nationalise banks. Once ownership changed, the govt pushed banks into unbanked areas and lend to common people.

One is not going into merits and demerits of bank nationlisation but just suggest how we have come a full circle now. Once again banking is seen to be controlled by top businesses just like we saw earlier. That time there were managing agencies which are not very different from how top groups have organised themselves. Yes unlike managing agencies today’s companies are owned by a wider shareholder base and run by professional directors, but wider control still remains with one controlling agency. And yes, we hardly have much of an industry even now.

However this time, the solutions being offered are just opposite. Earlier we pushed nationalisation and now we are pushing for privatisation. Unlike what we are told, quite a few experts supported bank nationalisation to rid India of this bank controlling problem. Just like we are supporting bank privatisation today.

How economic narrative changes over a period of time despite problems remaining the same..



One Response to “Nexus between Indian industrialists and banks comes a full circle..”

  1. Praveer Says:

    Very well researched and nicely put arguments.

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