Solution to the Problems of the Banking System

The problems affecting banks in our country are growing from bad to worse.  It is a matter of serious concern. 

One source of concern is that people are being made to bear the burden of capitalist loan defaults.  Over the past seven years, public sector banks have waived loans of Rs. 6,70,000 crores owed by capitalist defaulters.  More than Rs. 3,15,000 crores have been transferred from the central budget to make up for the losses suffered by these banks. Still the problem of bad loans is persisting.

Another source of concern is that people face the risk of losing their hard-earned savings whenever any bank becomes bankrupt and fails to meet its obligations.

The problem of capitalist defaulters is not confined to the public sector banks. In October 2018, the Managing Director of ICICI, the second largest private bank in the country, was forced to resign.  She was charged with having approved huge loans to companies in which she had a personal stake.  She is currently under investigation by the CBI.

In September 2018, IL&FS, one of the largest private non-banking financial services company in the country, defaulted on loans amounting to Rs. 99,000 crore.  This triggered a liquidity crisis in the financial services market. The officers in charge of IL&FS were arrested in April 2019.

As of March 2019, as many as 26 urban cooperative banks were under RBI directions to restrict depositors from withdrawing money from their accounts because of defaults by those who had obtained large loans from such banks. The largest of these cooperative banks was the Punjab Maharashtra Cooperative Bank, which nearly collapsed in October 2019.

In March 2020, State Bank of India advanced Rs. 10,000 crores to bail out the privately owned Yes Bank, whose capital had been eroded due to excessive accumulation of bad loans. Its Chief Executive Officer was arrested by the CBI on charges of money laundering and corruption while granting credit facilities. 

The crisis of the US financial system in 2007-08, which developed into a worldwide crisis, was precipitated by the speculative activities of giant-sized private banks.  More recently, Wells Fargo Bank, the second largest American bank, was accused for customer abuses and had to pay a fine of US$ 3 billion (Rs. 22,500 crore) in January 2020.  Between 2002 and 2016, this bank had opened millions of customers’ accounts without their knowledge. It had overcharged its borrowers, illegally took possession of cars and homes, given loans against false property records and purchased insurance without customers’ knowledge.

All of the above facts show that there is no basis for the claim that privatisation will solve the problems of the banking system. 

The source of the problem is that the present stage of capitalism is characterized by the drive of monopolies for maximum profits from every possible sphere.  Monopoly capitalist greed has converted banking into a system of looting the people through all possible means.

Monopoly capitalists use their political connections to get huge loans from state-owned banks for all kinds of risky and speculative investments.  Whenever such investments do not yield the expected returns, the capitalists default on their debt service payments and the government steps in to shift the burden of bank losses on to the backs of the entire people.

The drive for maximum profits leads to various methods of looting customers.  Banks engage in wild speculation in stocks, currency, bond and commodity markets, gambling with the money that people have deposited.  Bank employees are offered commissions and set high targets for mobilising deposits, selling insurance policies, mutual funds, etc. 

 Who owns the banks is not the only issue. The issue is whether the overriding motive of banking activity is to maximise capitalist profits or to serve the needs of society as a whole.

State ownership of banks does not in itself change their capitalist orientation.  As long as the state itself is controlled by the capitalist class, headed by the monopoly houses, state-owned banks will serve as vehicles for fulfilling monopoly capitalist greed.  To change the overriding motive, the nature of the state has to be changed.   

The existing state, which is an organ of capitalist rule, needs to be replaced with a state of workers’ and peasants’ rule.  Such a state can and will carry out the reorientation of banking and of the entire economy towards fulfilling the rising material needs of the entire population.  The entire process of production can be carried out according to one centralised plan, with the banking system playing a key role in fulfilling the credit needs of all productive activities.  The quantity of money circulation in the country can be so regulated as to meet the needs of transacting all productive and trading activities, while eliminating inflation and speculation. 

Bank workers in our country have been consistently demanding that banking should be oriented to fulfil the needs of society and not to maximise capitalist profits. In order to fulfil this just demand, it is necessary to establish workers’ and peasants’ rule and reorient the economic system towards fulfilling human needs instead of capitalist greed.  This is the only way to solve the problems of the banking system.

Reorientation of Banking in the Soviet Union
The construction of socialism in the Soviet Union was based on the Marxist theory of political economy, including the following fundamental postulates:  (i) Money is a measure of the value of commodities, that is, a measure of the quantity of social labour embodied in each commodity; (ii) only a commodity (such as gold) which has value can serve as a measure of other values; and (iii) bank notes or any other currency can fulfil the function of money only if they represent a fixed quantity of a commodity such as gold.
Following the Great October Socialist Revolution in 1917, all commercial lending activity as well as the function of money supply was brought under one single bank called Gosbank, directly accountable to the Ministry of Finance.  The function of Gosbank was (i) to assist by credit and other banking operations the development of industry, agriculture and goods turnover; and (ii) to implement measures designed to regulate money circulation.
Gosbank was the only source of short-term credit to all economic enterprises, including state enterprises, cooperatives and individual enterprises.  Specialised institutions were created to extend long-term investment loans to industry, agriculture, trade and municipal bodies.  Enterprises engaged in large-scale production were converted from being the private property of capitalists into social property of the whole people.  Small-scale enterprises, including peasant farms, were encouraged to convert their individual means of production into collective property and become cooperative enterprises.
Gosbank played a key role in developing a national accounting system and a credit system with measures for safeguarding against misuse of loans by borrowers. It was empowered to collect idle money lying with all government departments and enterprises, so as to regulate the amount and velocity of money within the country. It successfully brought inflation down to zero and eliminated all kinds of financial speculation.
The safety of all bank deposits was guaranteed by the Soviet state.  Interest rate on savings deposits was less than 1%, while credit was extended to productive enterprises at 2-3% interest.  No interest was charged on loans to the government.  The net interest income earned was adequate to cover the cost of operating the banking system, including the payment of salaries to all employees.

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