Indians Cling To Old Ways Of Banking

In 1991, India began transforming its socialist-style economy and opening up the manufacturing and services sectors to private investors, including ones from abroad. But the government has been slow to lift protective barriers in the banking and financial sector. That was in large part because of the opposition of bank employees, pensioners and hundreds of thousands of middle-class Indians who still trust only the government with their savings.

More than 70 percent of Indian banks are owned and heavily regulated by the government, as a result of the nationalization of banks in 1969.

"Our regulatory policies relating to banks have been conservative and, I used to think, maybe too conservative. But it turns out that it has paid off well," said Arvind Virmani, chief economic adviser in the Finance Ministry and a longtime advocate of overhauling the financial sector.

During a two-day nationwide strike of about 1 million bank employees last month, members of the All India Bank Employees Association demanded that the government stop privatizing banks. They pointed to the fall of Wall Street investment firms such as Lehman Brothers as proof that deregulation is not in India's best interest.

"Every time we would mention Lehman Brothers, the crowd would roar back, 'We don't want the American banking system,' " said the association's joint secretary, Ramanand, who like some Indians goes by one name. "We vowed to resist American-style reforms and privatization that would lead to massive unemployment and despair."

Although change is now being slowed, many analysts say that banks in India continue to sorely lack the capital needed to sustain growth and meet the nation's goal of being a 21st-century economic powerhouse. One estimate, for instance, says that India's infrastructure-financing needs of $500 billion to $600 billion cannot be met by the present structure of the banking industry.

Virmani praised how the old rules protected India in recent weeks, but he said the country will find it difficult to accelerate economic growth without changes in the financial sector. The country's opposition parties, including the Communist Party, have been blocking such efforts. They have stalled measures to lower government equity in banks, increase the voting rights of foreign stakeholders in Indian private banks, privatize pension funds and raise the cap on foreign stakes in insurance companies.

"How are we going to raise money? We need to go for these big projects, steel plants, cement and construction. No Indian infrastructure company can get money today. We have an enormous shortage of capital," said Deepak Parekh, chairman of HDFC, India's housing finance behemoth. "You can't have it both ways in an emerging economy like ours."

Many finance experts said that although India's banks may be isolated from global turmoil, its overall economy is not. Because Indian banks are tight with credit, many private companies are forced to seek investment from abroad. For instance, new foreign direct investment in the country will total $25 billion in the year that began April 1, up 56 percent from that period last year.

But the current crisis could dry up that stream of easy financing. "Just during the last few days, 200 American-backed projects for corporate office parks and technology back offices were delayed. . . . There is a real shortage of funds," said Ramesh Khanna, a real estate agent and financial consultant in Gurgaon, a suburb of New Delhi that is one of India's new technology corridors.

Some analysts said they hope that the Wall Street turmoil could ultimately help in devising the best models for change. "As soon as the dust settles down and the U.S. financial regulatory system recovers and learns its lessons, they would then bring in some safety clauses. It would have less system-destroying risks and would be more transparent," Virmani said.

But with its gate that is shut with a lock and chain and its guard wielding a World War II-era rifle, Rajgopal's bank still seemed safer to her than any investment house on Wall Street.

"When I read about the crisis, my first worry was for my son, who works in Barclays in New York," Rajgopal said, as she filled more forms. "He said about 50,000 jobs will be lost in this crisis."

Staff writer Ariana Eunjung Cha in Shanghai contributed to this report.