The Travails of the Indian Banking Industry

What is happening inside the great and mighty HDFC Bank! The Chairman with long years of experience in the topmost echelons of bureaucracy and after a five-year stint in the bank suddenly realises that there are “happenings and practices which are not in congruence with his personal values & ethics”. Without elaborating it.

Are such aberrations specific to HDFC Bank or rampant in the Indian banking industry? Are the high valuations by the so-called tech savvy private sector banks justified and to what extent?

Are these banks really effective and efficient as they claim to be and the investing public believes?

Dig a little deeper and the health of the banking industry, including banks such as HDFC Bank slowly reveals a different picture.

Their high valuations seem to be wholly on account of the competition (read public sector banks) being even worse, much worse.

Public Sector banks, including SBI, have been losing market share year after year over the last 30 years. Over a ten-year period from 2010-11 to 2020-21, the government had to pump in Rs.3,74,012 crores as equity to just make up for their inefficiencies and losses. Even in the mighty and holier than thou SBI a sum of Rs. 36,750 crores had to be infused as equity. This is tax-payers money - ie your and my money. For what purpose? Just because they are inefficient and ineffective.

This is only one part of the cost that you and me are paying. Since, these banks are not making money on their lending business, they give miserly interest rates on their deposits. Just about equivalent to inflation rates and often below it. The depositing public is effectively losing the value of their savings if they keep it as bank deposits. And then there is the double whammy - interest on bank deposits attract income tax at the highest marginal tax rate.

So, the public has responded with its feet by walking out from patronising the banking industry more than is essential. Long term savings are steadily moving out from the banking to the Mutual Fund industry for the last 10 years. This has its own set of issues, which we will keep for another day.

One of the key functions of the banking industry is to move funds from the household sector to the productive sectors (agriculture, industry, services) which in turn creates jobs and income. Credit to GDP ratios are stagnant and compared to world averages quite low. Services which account for 55% of GDP gets only around 30% of bank credit. Both Agriculture and Industry, especially MSMEs, are starved for productive credit. Factors such as these lead to retardation in growth rates of income and employment of the country.

Look at UPI transactions where banks face competition from app based entities. UPI move money goes from one bank account to another, but over 95% of transactions go through non-bank apps. Why so? Are these app providers doing it for charity!

What is the solution? Wait for the Small Finance Banks to grow over the next 5-10 years so that there is effective competition and things improve? It is estimated that GDP growth with improve by around 2% per year if we are able to fix the myriad problems of our banking industry.

Or do away with the root of the problem - once and for ever. Abolish the Department of Financial Services, under whose stewardship over the last 56 years the banking industry has come to such a pass. The babus of DOFS with their immense powers enjoy virtually limitless control rent while having no equity stake! A better example of perverse incentives at play would be difficult to find.

On Water and its Management : Experience with Rain Water Harvesting

I live in a large “gated community” in Hyderabad, designed and built by one of the country’s top most construction companies. It is spread over about 30 acres and includes more than 1000 apartments, Club House etc. Construction of the township started in around 2004 with the last set of apartments sold and occupied by 2010.

Water for the township’s requirements is sourced through three sources, HWSSB (Hyderabad Water Supply and Sewerage Board – Manjeera Water) and borewells. When both these fail to supply sufficient water, recourse to tanker water is taken which is both costly and of suspect quality.

The township also has three Sewage Treatment Plants (STPs) with aggregate daily processing capacity of 1,100 KL of sewage and generates around 600 KL of treated STP water every day. This water is used for flushing and irrigating the gardens and plants within the township. This still leaves a daily surplus of around 200 KL of STP treated water even during peak summer, which is currently disposed into sewer lines. Finding a regular buyer would give some regular additional income and the same is being actively pursued.

The developer had provided for a few borewells initially, but within a few years yields of most of these borewells started dwindling. Thereafter the Residents Welfare Association (RWA) got some more borewells drilled. But the yields of the borewells also started dwindling and became meagre and all of them used to go totally dry by the time summer approached.

The RWA then approached outside consultants for advice on Rain Water Harvesting. All the consultants advised to go in for harvesting of terrace rain water and use that water for recharging existing try borewells. A sum of nearly Rs.30 lakhs was spent for this purpose but there was absolutely no improvement in the yield of the borewells. This resulted in severe water crises during summer months with large dependence on costly water tankers.

Around the year 2019 detailed engineering drawings of an extensive Rain Water Harvesting (RWH) system built by builder was serendipitously discovered. This system has been designed and built to harvest every drop of rain water falling inside the township plus water from a small monsoon-fed rivulet flowing along the boundary of the township. All the rain-water from terraces and open areas feed into a network of surface storm water drains, which in turn feeds into the RWH system.

The RWH system consists of 15-16 RWH Chambers each 2 meters by 2 meters wide and 4 meters deep. All the RWH chambers are linked to each other by concrete hume pipes ranging from 3 feet to 5 feet diameter, with water flowing under gravity from one end to the other and underground network meanders all through the township. The system is designed to only let the water which does not get harvested to flow into the adjoining lake, which in turn acts as a natural rain-water harvesting pit.  Enquiries with sources in builder revealed that the RWH Chambers (RWHC) have been built at sites where percolation was expected to be good as per soil testing carried out by them.

Our records showed that the entire RWH system had not been desilted for the last 12-14 years. A couple of attempts had been made in the past to get it desilted, but the work turned out to be both challenging and expensive and as such further action was abandoned.

There were various challenges in getting the RWH system desilted. First, was whether desilting was operationally feasible with many residents being of the opinion that it was not, since no one had much idea of exactly what was the actual layout like (all of it being deep underground). The second challenge was whether getting it desilted yield any positive results based on the futile attempts made earlier. That is, would the costs justify the results – increase in yield of our borewells. Third, there was also a strong feeling that once the harvested water percolated into the local aquifers, there was no way one could be sure that the water would benefit the borewells within the township, which would be a waste of both effort and money. It might help others but not us. Lastly, was finding competent contractors who could undertake this kind of specialised work.

After a lot of internal deliberation, it was decided to get only three of the RWHC desilted on an experimental basis. As luck would have it, by this time the March 20 lock down took effect and finding any contractor willing to do this work became extremely difficult.

Incidentally, of the many contractors we contacted, one turned out to be the consultant who had advised us to get new RWH systems constructed (mark you this firm has quite a reputation in handling RWH projects in the local market). When we questioned him as to why he had advised us to get fresh structures constructed when desilting of existing structures would have been much cheaper and hopefully more effective, he gave some evasive responses and then promptly disappeared. It was obvious that the option he gave us would have much better margins for him – he had a perverse incentive in giving wrong advice while we lacked the knowhow to discern this.

We then turned lucky and found a contractor who was willing to do the desilting work. He lacked sophistication but more than made up for it through his practical and earthy approach. In this way we were able to get three of the RWHC desilted (2020-21) and in the process understood the intricacies and challenges of the work. The work consisted of basically sending labourers down into the RWHCs and physically remove the silt from them and the connecting pipes, and then disposing the silt. The silt removed was used to fill up some low-lying areas in the township. What we did find was that the entire RWH system was virtually choked with silt and a total of around 750 cft of silt was removed from just three RWHCs at a cost of about Rs.37,000.

The learnings from this experiment were, (a) the work could not be carried out during monsoon months since a humongous amounts of water flowed during this period. Ideally it should be carried out just after end of winter, say between January to March, (b) the underground channels were inhabited with snakes and other such creatures. This could be handled by lighting smoky fires inside the pipes and bursting crackers which drove away any snakes which were there.  (c) the biggest challenge (which turned out the easiest to resolve) was to locate the RWHCs since the whole area was built up and most of the openings were covered. The drawings indicated their existence, but locating the exact position was difficult. This is where our unsophisticated but earthy contractor showed his real worth. He arranged for one of his workers go down the underground connecting pipes from the one RWH chamber and then after reaching the next he would bang on the cover from beneath with his pick-axe. This way we were able to easily locate all the RWH chambers. The connecting pipes being of around 3 to 5 feet diameter it was not difficult for the workmen to move underground from one RWHC to the next.

With the knowledge gained in desilting three RWH chambers a comprehensive plan to desilt the entire system was drawn up and approval for required funds taken. The decision to get the desilting done was also supported by a very knowledgeable consultant, who advised that to maintain the effectiveness of any RWH structure, it should be regularly desilted. Ideally annually, but at least once every two years.

Finally, the entire system was comprehensively desilted during 2023-24 at a cost of Rs.4.40 lakhs and a total of over 4,500 cft of silt was removed. But the proof of the pudding is in eating it, and we were still not sure that desilting would improve yields of our borewells and by how much.

We then waited with our fingers and toes crossed, trying to avoid the snide comments of the nay-sayers, to see the effects of this exercise.

But our faith was rewarded. Starting end of 2024 (ie post monsoon) one by one some of our borewells which had gone completely dry started yielding water. We estimate that the value of water we drew from our borewells was more than Rs.30 lakhs during 2024-25. A pretty good return on investment of Rs.4.40 lakhs.

Encouraged by this, we next got the rest of our borewells surveyed and found that as many as 6-7 of them have substantial water yielding capacity. Due to long disuse these borewells had become dysfunctional and lacked pumps, pipes, electrical wiring etc. This is being addressed now, three borewells at a time. The challenge remains as to how permanent are the improvement in yields of these borewells and as such it is considered advisable to go forward with caution.

In future, we are planning to drill recharge borewells in the existing RWHCs to help recharge the local shallow aquifers so as to further improve the capacity and yield of our borewells. This is a low-lying fruit, since the entire structure for harvesting the rain-water is in place and functional. We just need to strengthen the water seepage capacity. Since presently we are not very sure on the cost-effectiveness and modalities of drilling recharge borewells, it is proposed to get 3-4 recharge borewells drilled every year at an annual cost of about Rs.2 lakhs and see its effects and slowly extend it to all the RWHCs.

The Ecological Implications.

The Deccan plateau is one of the oldest geological formations on earth and are approx. 3.5 billion years old. (The Himalayas in comparison are only about 72 million years old). Over this long period the rocks of this region have got much fractured due to both tectonic movement as well as through erosion / weathering. This is not to say that at various places there are massive sheet rocks. Due to this, nearly the entire underground shallow aquifers around Hyderabad has large water holding capacity. Water which has percolated down over millions of years. However, since we have been drawing out the ground water much faster over the last century than its percolation, the water table has been falling rapidly. This leads, over time, to need to dig deeper borewells and it also costs much more to draw the ground water from these depths. At many places the shallow aquifers have gone totally dry. Moreover, the deeper we dig to draw out ground water, the worse the quality of water becomes due to contamination with nitrates, arsenic etc.

Furthermore, due to urbanisation and consequent covering of much of the land with buildings, asphalt, and concrete the natural percolation of rain-water has been greatly impeded. This gives a double whammy to recharge of the shallow aquifers. To start with we are drawing ground water faster than the percolation and moreover, the natural percolation is hindered.

Another adverse effect from the falling water table is the consequences on local flora and fauna. The native trees of the area have evolved over millions of years to have roots which go down to the existing water table. With rapidly falling water tables, the roots of native trees are unable to evolve fast enough to go deeper to reach the water table. This in turn results in slow emaciation of many of these trees which has started to manifest itself in the phenomenon of their shedding their leaves much earlier in the year than what they did even 10 years ago. An immediate effect of native trees dying out is that the insects and birds who survive in them are bereft of means of survival and this cycle inexorably impacts our own very survival.

Some Concluding Remarks

Availability of good quality water in adequate quantities and at low cost is essential for life to survive. History is full of examples wherein entire civilisations have collapsed due to paucity of water. Much closer temporally, we know that Akbar had to abandon his newly built grand capital Fatehpur Sikri due to lack of adequate water in that area.

Transporting large quantities of water over long distances is expensive and is hardly a viable solution. Such water may be used for specific uses, such as irrigation or supplying drinking water, but just cannot make up for the water the local flora and fauna are used to and have evolved on over millions of years, and thus its continued use adversely affects the local ecology. It is well known that use of canal water for irrigation over time increases salinity and reduces fertility of the soil. It is therefore essential for sustained development and progress to harvest and use local rain water effectively.

And our experience gives us much hope that it is simple, easy, and inexpensive way to nurture our ecology and ensure our own survival.      

In this adventure I initially faced much resistance from within my community as most people were unconvinced on the effectiveness of the effort or the financial expenditure. It would not have reached its fruition without the unstinted support and advise of three of my neighbours and good freinds, Dr. Raghavendra Shivane, Mr. G V Prasad, and Mr. Uday Bhaskar. I am immeasurably indebted to all of them.

Home Town

“Now, please turn to the next form”, thundered Mr. Bannerjee. “You have to fill up details of your Home Town and Home Address in it”. Mr. Rathindra Kumar Bannerjee, a huge and extremely overbearing man, was the official from the Human Resources Department getting a whole sheaf of forms filled up by us, a group of fresh recruits joining one of the nationalized banks.

Everybody obediently started filling up his or her respective form. There was a little hubbub as some peaked to see his / her neighbour’s “Home Town”. Other than that, there was little confusion in the room as this seemed to be a fairly straightforward requirement, compared to the myriad forms we had been filling up in the post-lunch session of our first day of induction.

But this simple request from Mr. Banerjee left me quite perplexed. Meanwhile, Mr. Bannerjee kept on issuing a stream of interjections at a steady pace on the need for filling up this form, the considerations one should keep in mind in deciding on which place should be designated as the “Home Town”, and the implications this particular piece of bureaucratic record would have on our future bright career in the bank.

This seemingly simple requirement left me in profound dilemma. I ultimately very politely raised my hand and asked, “Sir, I do not have a Home Town. May I leave this form blank?” There suddenly was pin-drop silence in a room full of people with their heads fixed backwards, as everyone looked back (I was sitting in the last row as usual) to get a look at someone who asked such silly questions. Meanwhile, Mr. Bannerjee’s eyes popped out and he opened and closed his mouth wordlessly a couple of times.

“Well, your Home Town”, he finally managed to croak.

“But Sir, I do not have such a place which I could call as my Home Town”, I countered helplessly.

The fact being that there was no particular place I could call my “Home Town”. Strange as it may sound to most people, this was my case. I knew I was ethnically a Bihari but beyond that had no affinity to any place. I had lived all my life till then (and also subsequently) hopping around from place to place, from one town to another every two or three years. And so had my father and grandfather, both having been in transferable jobs. My grandfather had migrated from his native village (Village Kumbhaila, PO & Thana Piro, District Arrah) sometime early in the last century and rarely visited that place thereafter. The last time anyone from our immediate family had visited our ancestral village was over forty-five years prior to the date of this incident. I would later visit ‘my” village once, for a few hours, but that is another story.

Finally, after deep thought, Mr. Bannerjee asked me to fill up the place where my parents lived currently. This also failed to solve my predicament. My father was dead and my mother lived with my elder siblings, rotating from one to another. At that moment she was visiting my brother who had migrated to the US and settled there. Could I fill up as my “Home Town” a city in a country that I had never visited and had no connection whatsoever? 

Education & Employment

Prof. Gourishanker Hiremath, who teaches Economics at IIT Kharagpur, in his article in The Hindu (31/05/2025) has analysed and listed the issues relating to the employability factor of people passing out of our higher educational system. However, I am uncomfortable with his conclusions and recommendations.

Prof. Hiremath correctly counter-balances his observation that the growth in enrolment in University level courses, “suggests a dynamic academic landscape full of potential”, with the fact that the “degrees are proliferating faster than meaningful job opportunities”! This is indicative of the reality that our society is either not creating enough jobs or our educational system is failing in transforming our youth for the kinds of available employment opportunities. Due to this many of the jobless are trying to kill time and delay the stigma of being considered jobless by enrolling in university level courses ("postgraduate degrees and PhDs are frequently pursued not just for intellectual fulfilment but as a refuge from the job market"). At the same time industry spokespersons keep lamenting that they find it difficult to find suitable persons for entry level openings in their respective industries. 

The good professor goes on to mention that as per the Ministry of Statistics data, the unemployment rate tends to increase with higher education levels, which is indicative of the disconnect faced by millions of educated young people in translating their college degrees into productive and paying career opportunities. His take of this situation is that the way our higher education courses are designed and implemented emphasize rote learning over practical skills and the solution offered is to integrate practical skill modules in existing curriculum.    

As an economist I am sure that Prof. Hiremath would be familiar with the work of A. Michael Spence who examined the reasons as to why people spend so much time and money to acquire a college education. As per Spence they invariably do so because they want good jobs, since most job openings make a college degree the minimum requirement for the job.

Spence was awarded the Nobel Prize in Economics in 2001 based on an essay which he wrote in 1973. In this paper he explained why people spend so much time and money acquiring education. His theory is that employers have no way of easily finding out the skills and productivity of their prospective employees. Smart people acquire education because they want to send certain signals about their skills and productivity to their prospective employers. Employers who have no way of ascertaining the capabilities of the people they hire, in turn, look for precisely these signals.

Much before Spence wrote his celebrated essay, Ved Mehta published his book Fly and the Fly Bottle (1963) based on his interviews with a number of British philosophers. In course of his discussions, he enquired as to why do some of the brightest students study Philosophy at Oxford & Cambridge, and what kind of careers do they embark on. The insight he got was interesting. It seems that such students go on to become the best businessmen, the best politicians, and the best bureaucrats - very few become professional philosophers or academicians. The reason given was that study of philosophy helps in greatly training and sharpening the mind so that they are able to excel in any profession they chose. 

It is well known and acknowledged that university level education, irrespective of the subject studied, helps in developing critical thinking skills which can be widely applied in various areas of productive human endeavour. But such jobs are few in number. Even more pertinent, is whether widespread availability of critical thinking skills the need of our society and economy? Considering that our primary education system is in shambles and study after study have established that school level learning outcomes on the average are poor. 

About 25 years ago, I noticed that most of the graduates from BHU-IT were joining the IT industry, irrespective of their branch of specialisation – from metallurgy, to ceramic, civil, electrical & electronics, to computer science et al. I enquired from a very senior level IT professional as to the reasons for their preference to recruit engineering graduates for entry level positions. He started laughing and responded that it was not because of their technical skills but the fact it is easier to teach them coding. All new recruits were put to learning basic software development skills and absorbed only after successful completion of their training, which can last from six month or more. Those who could not come up to standards were let go (another reason for the high turnover in the IT industry - but hardly ever discussed or mentioned). There was no other way to evaluate the learnability factor of new recruits and our higher educational system was just not producing enough number of young people with skills required by the IT industry.  I am sure that the same situation persists even today.

Spence’s theory of market signals does not rule out that education increases skills, but it argues that most people do not acquire education to acquire additional skills. People who are inherently more capable and smart, acquire higher education so that they can show that they are smarter than others.

The criticism of Spence’s ideas is that if education is just a signal, it really is a very expensive and time consuming signal. Surely there should be cheaper ways of sending this signal! It also seems that the cost of these signals has been rising over time. For instance, certain jobs that were earlier available to people with high-school certificate are not open to them any longer - one has to be at least a graduate to apply for such jobs. So as per Spence’s theory, smart people have to spend more time and money to prove they are smart. Leading to a situation where a smart high school educated person cannot apply for that job, whereas a stupid college graduate persona can. Therefore, smart high school students make sure that they acquire a bachelor’s degree, otherwise no one will know how smart he or she is!

One solution to this seemingly impossible situation could be to have an all-India exam open to all who have passed their Class X or XII to ascertain their intelligence, aptitude, communication, numerical skills etc. Skills which an average university graduate is expected to attain. Anyone with a certain minimum cut-off score would be considered eligible for a job opening where a basic graduate degree is required. Or based on scores on different aspects, such as aptitude, communication or numerical skills, the industry can recruit them as trainees on a small stipend at a younger age bracket and confirm them as permanent employees after one to two years. Over this time, the worth and suitability of such trainees should become clear. Such a mechanism will not only save the humongous amounts of wastage of time, effort, and money spent by a large number of young people (and the government) trying to acquire a university degree, but also ensure a steady stream of suitable trainees for industry. 

How important are Interest Rates in nudging Investments?

Every time the RBI changes or decides not to change the bank repo rate, it invariably is front page news in all newspapers and portals. This decision is also minutely analysed by economists, analysts, and editorial columns. The discussion invariably centres as to how it would affect the economy in terms of accelerating or damping investment rates and consequently the economic growth, and inflation rates. A side issue is what would be the effect on interest rates on bank deposits and loans. This line of thinking pre-supposes that interest rates are the primary factor effecting economic growth and inflation rates and have a direct and proportionate effect on both.

While it is true that employment, investment, or growth is directly linked to the amount and kind of investment a society or country makes, the assumption that supply of and demand for credit are solely or even largely dependent on interest rates is simplistic and fallacious since it ignores two critical determinants, namely, the terms of credit and animal spirits. That is, for investment to happen, two preconditions are essential. First, availability of easy and reasonably priced external funds to supplement and leverage the promoter's capital, and second, entrepreneurs’ confidence that they would get adequate return on their investment. These two pre-conditions are independent of the government’s efforts to prime the pump through reduction in interest rates. We seem to be failing on both counts.

Interest rates are the cost of capital, i.e., the price agreed between the borrower and lender for any borrowing / lending transaction. In any borrowing / lending situation while the first leg of the transaction (lending) happens in the present the second leg (payment of interest as well as repayment of principal) happens in the future. As all of us are aware the future is always unknown. This in turn creates something known as credit risk, i.e., whether the borrower will repay as agreed, or does he have both the capability and the intention of repaying. A very difficult question at the best of times.

To reduce credit risk, banks stipulate a host of conditions on the borrower which go under the rubric “terms of credit”. This includes aspects such as security (collaterals), purpose, amount, tenor, positive and negative covenants, legal documentation, penal charges etc. etc. These conditions are stipulated in the hope that the borrower is encouraged to repay. In the Indian context, the primary instrumentality for determining the terms of credit is the banking system, which due to its broken governance systems has been unable to evolve a reasonably workable conceptual framework or associated processes to evaluate and determine the various terms of credit. The end result is difficulty along with prolonged delays in accessing bank credit, with many of the stipulated terms of credit having no relationship with the relative credit exposure.

Bank credit is not the sole source of external funds, but the comfort it provides in terms of the assurance that some kind of due diligence has been done and someone is monitoring the borrower, is what enables other sources - both formal and informal (NBFCs, MFs, friends and relatives etc) - to free ride and provide supplementary funding. 

The fact that Indian industry is not getting adequate credit manifests itself in various ways. For example, Bank Credit to GDP in India at around 50% is virtually half the global average and a quarter of levels reached by China. Or the fact that while the Services sector of the Economy contributes more than 50% of the GDP, it receives only about 30% of bank credit. Even the meagre amounts of credit it is able to raise is largely predicated on availability of collateral security and not on its ability to service debt. 

No political dispensation wants to let go or reform the banking system since its control gives it tremendous power. Moreover, no reform in the banking system is possible as long as DOFS exists in its present form, since it provides humongous control rents to its mandarins with no equity stake. A situation of clear and extreme perverse incentive to maintain the status quo.  

Now coming to the second reason – the dropping levels of animal spirits. This term owes its origin to John Maynard Keynes who in his 1936 book The General Theory of Employment, Interest and Money used it to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior, and which can be measured in terms of, for example, consumer confidence. It has since been argued that trust is also included in or produced by "animal spirits".

Trust is the basic glue which holds society together and builds confidence, essential for animal spirits to emerge and encourage entrepreneurs to make productive investments. The result of the emergence of the strategy of fostering continuous friction between different social groups as the primary means for maintaining political power, is that the level of trust has naturally reached a very low ebb in our society, and is continuously receding. Naturally, this has resulted in adversely impacting the willingness of our entrepreneurs to make investments.

Both these conditions hit our informal / MSME sector especially hard. The sector which not only generates the bulk of our production, employment, and exports but provides the very foundation on which the economy rests.

The five trillion dollar question therefore is, would reducing interest rates without addressing factors affecting the terms of credit and levels of animal spirits, have any kind of positive effect on our investment levels?

Without first addressing both these issues, namely rebuilding trust in society and reforming our banking system, there can be no succor.

Think! 

Some Thoughts on Our History

There are a few things about the history of our country and society, at least the way we were taught at school and which permeates the popular perception, which does not really add up logically. The more I think of it, the more dissonance it creates in my mind! One of them is classifying the medieval period, say from around 10^th century AD till the early 19^th century as falling under “Muslim Rule”, as a consequence of “Muslim Invasion”.

Specifically, the issues which have been troubling me include:

(a) Why do we paint a period of our past as "Muslim Rule". While many of the rulers during this period traced their ancestry to Arabs, Persians, Turks, Afghans, Mongols etc., each of these social groups had a different language, culture, and tradition. Each also practised their Muslim faith differently. Their "Muslim" identity was only incidental. So why the stress on only one aspect of their identity!

(b) Wouldn't it be more appropriate to classify them as "immigrants" rather than as "invaders"? Firstly, because there has been extensive trade and cultural relationships between the Indian sub-continent for centuries and there has been a steady and constant flow of people from other lands into India during this time. This interaction and enriched, on both sides, our language, culture, science, technology, mathematics etc. There are so many words in common usage which few realise are either of foreign origin. For example, kursi, kalam, darzee, la jawab, ajeeb-o-gareeb etc. In fact, the Arabs still call their numerals as “Indian” numerals and while their language is written right to left, their numeral place system follows a left to right orientation. The ultimate irony is that our very identity as a “Hindu” is based on nomenclature given by the Persians and Arabs! Secondly, nearly all such immigrants they stayed back in the sub-continent as Indians. I understand that even the much reviled Mahmud of Ghazni also minted coins with Indian / Hindu motifs. Looking at more recent history, the British came to India as traders not invaders. In our times, Indians have started taking key leadership positions in the US and Canada. Can they, by a very long shot, be referred to as invaders? 

(c) Emigration - leaving kith and kin for the unknown - for anybody at any time is always a very painful affair. As such, there need to be very strong reasons to emigrate. Primarily, self preservation or economic. On the economic front, was the migration promoted by the fact that such migrants brought in much needed and valued technical skills which for some reason was in high demand but low supply? What explains the fact that across the sub-continent, there is a preponderance of Muslim artisans in many of our traditional industries - carpet making, weaving, metal work, embroidery, bangles etc. Or that Muslim technicians are fairly widely available in the form of local TV repair man, AC technician, or motor mechanic in all each and every nook and corner of India? 

(d) Another aspect of migration is that it is seen that economic migrants are predominantly males, at least initially. This leads to the problem of them finding local women to set up families. This aspect is widely indicated in our mythology where many of our Aryan heros (think Arjun, Bhim etc.) had at least one wife who was a non-Aryan woman. Extending this argument a little further would the current Indian Muslim population primarily represent Indians who converted to Islam or the progeny of migrant men from local women? Something like our Anglo-Indian population?

I am looking for answers to these doubts and would be helpful if any of my friends / readers could throw some light on these issues.  

India's Real Wealth Creators

Yesterday I came across an interesting article in The Wire titled, Who Are India's Real Wealth Creators? This article pursued an interesting line of view, but I think totally missed the import of this idea.

For society to grow and progress it is essential that societal savings are transformed into productive investment, which in turn creates jobs, income, and growth. The primary conduit for doing so which has evolved in India is the banking system. Unfortunately, this is also one of the weakest links in our growth process. Not only is our banking system not very effective in transforming domestic savings into productive investment, but they do it very inefficiently. 

Bank Credit to GDP ratio of the Indian banking sector is around 55%, compared to the world average of 99%, China at 182%, and Brazil at 70%. This reflects how ineffective our banks are in the transformation of savings into investments. Moreover, the essentially security-based lending that they practice leaves out much of the services sector of the economy which now contributes more than 50% of GDP but gets only about 32% of bank credit. These statistics are from NCAER Working Paper  141 - Privatization of PSU Banks in India: Why, How and How Far and are about 2-3 years old.

Even the meagre amounts of credit they disburse is of low quality, with periodic instances of industry-wide high NPA levels. Banks are highly leveraged entities with low operating margins. Therefore, the margin of safety available to them is very thin and start making operating losses if their Gross NPA ratio is more than 3% to 4%. What we have witnessed is Gross NPAs levels of over 25% in the mid nineties which was brought down to a very manageable level of 2% by 2009 but went up of over 15% by 2019. Such high levels of Gross NPA levels are not indicative of sick banks – it reflects the hard fact that these banks were technically dead with effective negative networth! Such banks are known as zombie banks and have an extremely pernicious effect on the economy.  

This sad state of affairs has basically been covered by pumping in tax-payers funds in case of PSU banks and by merging sick private banks with other banks, often PSU banks. This in turn creates major moral hazard problems since public funds are used to cover private vices, with little to show in the way of improving governance or outcomes - basically hiding the dirt under the carpet.  

The genesis of this poor state of our banking system can be traced to the policy of bank nationalisation in 1969. In the words of Arvind Subramaniam in his book Of Counsel, "If you were to ask me what the two egregious economic sins we committed in the past were, they are the Industrial Policy Resolution, which started the licensing of industry, and bank nationalisation in 1969.”

Raghuram Rajan & Rohit Lamba are even more forthright in their views on this subject. In their book, Breaking the Mould, they have virtually equated bank nationalisation in 1969 to demonetisation in 2016 and conclude that, "few would assert it benefited the nation"!

As a society we have been very vociferous in denouncing demonetisation, but bank nationalisation which has been much more pernicious and damaging for the economy has got little mention by our media or policy makers. Vast swathes of the public still truly believe that it was an economic masterstroke.

The introspection on this sorry state of affairs started way back in 1991, but there is little improvement to show for it. The pathological effects of control by Department of Financial Services (DoFS) over the banking industry has  been documented time and again starting with the Note by Prof M Datta Chaudhury and Shri M R Shroff in the report of CFS (Narasimham I), to the Nayak Committee Recommendations, and by Viral Acharya and Raghuram Rajan in their 2020 paper, Indian Banks: A Time to Reform, wherein all of them have strongly recommended for abolition of DoFS as essential to ameliorate the poor state of our banking industry. 

Even at the time of nationalisation in 1969 there were some very sane voices who did not agree to this policy. But it was all drowned in adulation for Mrs. Gandhi. I have discussed some aspects of the genesis of this retrograde policy decision in my blog on the subject of Bank Nationalisation. Here is the link - https://sushilprasad1.blogspot.com/2023/07/

The true creators of jobs, income, wealth in our country is the MSME sector which directly employs nearly 6 lakh workers, and contributes about Rs.4 lakh crores to national output and 35% of exports. The broken banking sector makes it difficult for industry to raise funds to set-up and grow thereby stunting equitable growth. The larger borrowers face fewer issues in raising funds due to a number of factors - political backing, ability to offer tangible security, more information being available about them in the public domain - including credit ratings. Most of which is lacking for the MSME sector. 

The damage to the economy and society does not end there. Because our banks are not very good in the lending business, they make up their margins, inter alia, through under-pricing deposits. This in turn means that real interest rates that the savers get on bank deposits have largely been negative over long periods in the past. Over the last 4-5 years there is a steady movement of household savings to the Mutual Fund industry. This can be the cause of systemic risks to the economy and lead to another set of problems, but is nowhere on our radar. The higher returns from MF investments also carries much higher market risks which very few are even aware off. 

The broken banking industry in India was succinctly summed up by The Economist in their issue dated 10th April 2008. In their words, "“they leave India’s savers with too little reward for their thrift, its borrowers with too few alternatives to the money lender, and its incumbent firms with too much protection from upstarts who cannot raise money to compete." There is nothing to remotely suggest that there has been any tangible change in this situation.