1 State-Owned Banks in Brazil and India: Recent Experiences Compared 1 Maria Antonieta Del Tedesco Lins 2 Paper to be presented at the International Studies Association Annual Convention, San Diego, April 1-4 2012 Panel: Challenges and Responses in the Global Financial Sector (Sunday, April 01, 2012 1:45 PM) Abstract The study of the importance of state-owned banks in the dynamics of national economies, economic development and social policies has assumed prominence especially since the 1990s amid a diffusion of liberal policies and the opening of financial systems, particularly among emerging markets. However, in large emerging economies, the presence of state banks remains a key element of national financial dynamics. Brazil and India are part of this group of economies. In Brazil, three federal financial institutions account for a significant portion of credit, and operate according to a specific division of labor in the financial sector. In India, even after a major liberalizing reform in the 1990s, public banks still account for more than 80% of credit and deposits. This paper aims to compare the role, space and operation of public financial institutions in both countries and the particular characteristics of each experience. Next steps of the research will examine the hypothesis that public banks in Brazil and India have functioned as instruments of the promotion of public policies - whether these policies be geared towards development or seek to stimulate economic activity. 1. Introduction The presence, size, and scope of state-owned financial institutions in both developed and developing nations are a controversial subject in political and academic debates. Since the 1960s and 1970s, there has been extensive literature that identifies the problems caused by excessive state presence and regulation in the financial system and that defines situations as representative of financial repression. These works have contributed to the dissemination of ideas and financial 1 This work is a preliminary version prepared for discussion at the International Studies Association Convention 2012 and is part of a wider research project. Please do not cite. For updated versions, please contact the author. Research assistance of Kevin Gatter is gratefully acknowledged. 2 Institute of International Relations, University of São Paulo, Brazil.
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State-Owned Banks in Brazil and India: Recent Experiences Compared1
Maria Antonieta Del Tedesco Lins2
Paper to be presented at the International Studies Association Annual Convention,
San Diego, April 1-4 2012
Panel: Challenges and Responses in the Global Financial Sector
(Sunday, April 01, 2012 1:45 PM)
Abstract
The study of the importance of state-owned banks in the dynamics of national economies,
economic development and social policies has assumed prominence especially since the 1990s
amid a diffusion of liberal policies and the opening of financial systems, particularly among
emerging markets. However, in large emerging economies, the presence of state banks remains a
key element of national financial dynamics. Brazil and India are part of this group of economies.
In Brazil, three federal financial institutions account for a significant portion of credit, and
operate according to a specific division of labor in the financial sector. In India, even after a
major liberalizing reform in the 1990s, public banks still account for more than 80% of credit
and deposits. This paper aims to compare the role, space and operation of public financial
institutions in both countries and the particular characteristics of each experience.
Next steps of the research will examine the hypothesis that public banks in Brazil and India have
functioned as instruments of the promotion of public policies - whether these policies be geared
towards development or seek to stimulate economic activity.
1. Introduction
The presence, size, and scope of state-owned financial institutions in both developed and
developing nations are a controversial subject in political and academic debates. Since the 1960s
and 1970s, there has been extensive literature that identifies the problems caused by excessive
state presence and regulation in the financial system and that defines situations as representative
of financial repression. These works have contributed to the dissemination of ideas and financial
1 This work is a preliminary version prepared for discussion at the International Studies Association Convention
2012 and is part of a wider research project. Please do not cite. For updated versions, please contact the author. Research assistance of Kevin Gatter is gratefully acknowledged. 2 Institute of International Relations, University of São Paulo, Brazil.
2
liberalization policies in both the domestic and international spheres (e.g. McKinnon and Shaw,
1973).
The study of the importance of state-owned banks in the dynamics of the economy, economic
development and the reduction of inequality have become increasingly relevant since the 1990s
in the midst of the implementation of liberalization policies and the opening of financial systems,
especially in developing countries. The 2008-2009 economic crisis gave rise to new questioning
of financial liberalization due to the consequences of excessive deregulation and financial
institutions’ limited scope of action. National governments strongly intervened and were
followed by the nationalization of financial institutions, only this time, in circumstances and for
reasons that were completely different.
This paper intends to compare – in a preliminary manner – the size, space, and the actions of
state-owned financial institutions in two large emerging economies: Brazil and India. More
precisely, the objective of this text is to briefly discuss the role played by these institutions since
the industrialization period as instruments of public policies and their respective roles within
national financial systems.
A comparative study of public banks in different emerging economies could provide
important insight for understanding their role in economic development and assessing the notion
that public financial institutions excel due to the inefficiency and prevalence of political interests
in their operations. More broadly, the research intends to examine the hypothesis that public
banks in Brazil and India have functioned as instruments of the promotion of public policies
(whether these policies be geared towards development or seek to stimulate economic activity)
as well as the notion that they were tools for countercyclical policies in different moments before
and during the global economic crisis of 2008-2009. This will be completed more thoroughly in
further studies.
The comparison between India and Brazil fits various criteria. In addition to the magnitude
of its public banking system – more than three-quarters of the banking system is under state
control, if we consider figures as total deposits, interest income or number of offices– India’s
historical experience of strong state participation in the financial system, financial reforms
implemented in the early 1990s, and its recent experiences (such as with microfinance) justify
the study. In Brazil, state participation in the financial sector is remarkable and public
3
institutions have clear specificities despite the deep transformation in the public banking
landscape in early 2000s, with the privatization of the state banks. Three Brazilian federal banks
are responsible for a considerable part of total credit and they operated according to a very
precise and logical pattern, which establishes a clear division of labor between them.
The presence of public institutions has been determinant for the evolution of the Brazilian
and Indian financial systems. Because of their size and eventual advantages, public banks bring
specific features to the functioning of the markets. At first glance, one sees more similarities than
differences between the two countries’ banking systems. But there are considerable differences
that must be explained by distinct factors such as their political history, macroeconomic stability
and precise choices concerning the liberalization process that began in the 1990s in both
countries.
Table 1 brings some general information about the two financial systems. After financial
reforms in India (initiated in 1991) and the stabilization process in Brazil, Brazilian monetary
reform happened in 1994 and a new macroeconomic policy framework was adopted in 1999.
The two economies then witnessed a deep transformation in their financial system both by
further institutional reforms and by the new dynamics in domestic markets. Nonetheless, credit
provided by the banking system remains relatively low when compared to more advanced
economies. Interest rates are charged extremely high in the Brazilian case and relatively low – as
a result of monetary and financial policies – in India. Banking market dynamics seem different in
both countries possibly due to the role assumed by public financial institutions.
Brazil and India are large economies, with a considerably important industrial sector, large
domestic markets and, flourishing, though underdeveloped, capital markets.
4
Table 1. Some General Indicators of Brazilian and Indian Financial Sectors
Domestic credit
provided by banking
sector (% of GDP)
Lending interest rates, % Real interest rates, %
Bank
nonperforming
loans to total gross
loans (%)
Market
capitalization of
listed companies (%
of GDP)
Brazil India Brazil India Brazil India Brazil India Brazil India
BNB Public Federal 25.641.894 11.051.439 8.816.123 119.103 187 17,3
Total Brazilian Financial System 5048139484 1919704141 1658517543 21347432 20389
Source: Brazilian Central Bank
In relative terms, the three federal banks represent circa 40 per cent of the whole financial
system in total assets, credit and total deposits.
Brazil did not undergo a formal financial reform to reduce state participation in the financial
system. As noted before, the transformations were mainly the result of market adjustment to the
post super-inflation period, together with a non-aggressive opening to foreign institutions.
Federal banks consolidated their space in a more concentrated market and gained from their
relative advantages compared to private banks.
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Table 5. Relative Importance of the Ten Largest Brazilian Financial Institutions
(percent of total financial system)
Institution Ownership type Total Assets Total Credit
Operations (all types) Total deposits
BB Public Federal 18,0 19,6 25,3
ITAU Private National 16,1 14,6 14,3
BRADESCO Private National 12,6 11,9 13,6
BNDES Public Federal 11,2 10,2 1,3
CEF Public Federal 10,0 11,8 15,5
SANTANDER Private Foreign Contr 8,4 8,6 7,2
HSBC Private Foreign Contr 3,0 2,4 4,6
VOTORANTIM Private National 2,5 3,1 1,5
SAFRA Private National 1,8 2,1 1,0
CITIBANK Private Foreign Contr 1,2 0,7 1,0
BTG PACTUAL Private Foreign Partic 1,2 0,3 0,9
BANRISUL Public State 0,7 1,0 1,3
DEUTSCHE Private Foreign Contr 0,7 0,1 0,2
CREDIT SUISSE Private Foreign Contr 0,6 0,1 0,2
BNB Public Federal 0,5 0,6 0,5
Source: Brazilian Central Bank
Given the structure of the Brazilian and Indian financial systems, the relative importance of
state financial institutions and the dynamics of their actions as promoters of public policies, the
further steps of this research should seek to understand the comparative analysis – with the
support of empirical exercises – of the relations between their respective political systems,
governments, and some of the banks. Differences between the two political systems and the
recent economic history of both countries should indicate various specificities in the actions of
public banks. In Brazil, the program of reorganization of public institutions in early 2000s led to
the disappearance of state banks and, consequently, a redistribution of their old activities. In
India, state institutions are still greatly important despite being objects of criticisms relating to
inefficiency and corruption.6
6 The subject of corruption, despite present in the history of financial institutions in both countries, will not be a
subject of discussion of this paper, remaining instead as one of the factors for the evaluation of the degree of efficiency of these institutions.
18
Brazilian and Indian Banks since the International Crisis of 2008
As everywhere in the world, the financial crisis of 2008-09 affected Brazil and India in two
major areas: international trade and credit restrictions. The liquidity crunch in international
financial markets affected both large companies with the capacity to collect funds in these
markets and financial institutions with operations abroad and with credit portfolios bound to
international markets. It is natural that countries with deeper financial opening would be more
affected by the credit crunch than countries with lower exposure to worldwide markets.
Even with different degrees of financial opening abroad, Brazil and India belong to a group
of developing economies that are relatively less vulnerable to the crisis of liquidity caused by the
collapse of financial institutions in the United States and in other industrialized nations.
Both countries suffered a considerable reduction in economic production/activity in 2008 and
2009, but India did not have a recession and maintained growth rates relatively higher to those
registered in emerging economies during these years. Growth in Brazil is traditionally more
modest, but the speed of recovery was notable.
In this way, lower international exposure and the strong presence of public financial
institutions acted as crucial elements in the reaction to the effects of the crisis. In the two cases,
the presence of certain restrictions and controls on the foreign capital flows – which was much
more accentuated in India than in Brazil – prevented the domestic financial systems from
suffering stronger contamination from the global crisis.7
Besides this, both relatively
conservative financial management and regulation and the unique historical evolution of the
financial systems prevented the financial institutions in both countries from having taken
excessive risks. Goyal (2012) argues that some characteristics of the ‘repressed’ financial
systems in emerging markets acted as a protection for these countries during the crisis. In both
Brazil and India, little external exposure and indebtedness and quite conservative financial
regulation limited risks and allowed the state to pursue more aggressive countercyclical policies.
State-owned banks were key elements of countercyclical policy in both countries. In Brazil,
in spite of some political reactions, federal banks carried out a policy of expansion of credit,
7 It should be noted, in the Indian case, that a source of vulnerability was established not through banking
operations, but through the exposure of Indian transnational companies in the market of London. Large Brazilian companies suffered a similar impact as a result of exchange operations in future markets, yet this phenomenon was not determinant to the economy as a whole.
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especially to the activities of the domestic market, such as household consumption. In India,
public financial institutions did better during the crisis, lending more than their counterparts
throughout the crisis. Another interpretation could be that deposits were directed towards public
banks knowing that these banks could count on government support in any circumstance (Prasad,
2011).
Issues surrounding the presence, the scope of action and the efficiency of public banks
remain on the agenda. Twenty years after the liberalization reforms began, and with lessons
learned from the recent crises, the financial system is always seen as a key element to support
and long-term growth.
4. Concluding Remarks: Initial Elements of Comparison
Despite their respective crucial importance in national economies, several differences
between the Brazilian and Indian public banks trajectories are perceptible. Not only in terms of
their respective size in domestic financial markets but also their significance and weight in
economic and political life, Brazilian and Indian public banks are remarkably different.
From the point of describing the main characteristics of the two countries on the subject, the
research must now proceed to the specific comparison of the issues that could be identified from
the steps made so far.
The dissimilarities are present in various aspects. They deserve a more accurate – and
eventually quantitative – analysis, but it is already possible after literature review and
observation of row indicators to briefly present some of them.
1. Functions within broader policies of development and sectorial stimuli
In both Brazil and India public banks played precise roles in supporting the finance of
strategic sectors. In India, the task of lending to priority sectors has been spread more broadly
among financial institutions and not concentrated only on public banks. In Brazil, although
policies of direct credit are still in place for agriculture and housing, the margin of operation of
private banks is still broader than the one left for the Indian ones.
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2. Relations of policies at both the national and subnational levels (definition and
defense of regional interests)
After the privatization of Brazilian state banks, regional credit policies are less clearly
identifiable. Federal banks generally design and implement national policies, with no regional
direction.
3. Relations with private financial intermediaries.
In both countries, public banks share the different market segments with private and market
institutions. The operational framework in the different markets requires a more cautious
analysis of public-private relations and competition.
The Brazilian development bank, BNDES, does not collect funds from markets and runs
separated credit policy, determined by central government. The bank has had, since its creation, a
mandate to promote infrastructure, industry and growth. It has used federal funds, i.e.
compulsory savings federal funds, transfers from Treasury, among others to lend to private
sector companies, according to priorities defined by the federal government. BNDES thus is
unique and does not compete nor share parts of the long term credit markets with private
investment banks. Caixa Econômica Federal and Banco do Brasil combine specific official
credit mandates with typical private credit operations. They compete with their private
counterparts and perform extremely well.
The broad presence of public institutions in Indian financial markets makes the discussion of
their relations with private institutions more complicated. First, there are various types of public
institutions and they are spread out in almost all segments of the different markets. Second,
regulations and restrictions imposed on private financial intermediaries are high and, in many
cases, similar to the ones applied to the public ones. Third, most of these banks are listed in
capital markets. Finally, the transfers of funds from the government to the banks, in the Brazilian
case, give them undeniable advantages compared to the private institutions.
The State Bank of India’s wide presence in Indian banking is comparable to Banco do
Brasil’s presence. Their relative advantages due to size, localization, multiplicity of operation
‘fronts’ show that a comparison between the two institutions may be very relevant.
4. The role of financial regulation and rules of national financial systems
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Brazil and India have very regulated financial systems. There are deep differences, especially
regarding banking system operations and the institutional form and mandate of the respective
central banks.
***
Summarizing the initial efforts for a comparison, some ideas for discussion are presented in
the following table.
The political environments in Brazil and India were extremely different if we consider the
period 1950-2010 in the analysis. India had always been a democracy during this period and
Brazil had twenty five years of military dictatorship. Efforts for the construction of a national
project for development were made in both countries, although within very different ideological
orientations.
Some of the economic features of the public banks activities were already presented above.
Some more reflections need to be made with the support of data and using a ‘political filter’.
Brazil India
Political orientation
Developmentalism / “National”
project military governors/
remain important during
democratization
Electoral socialism/
Multipartyism /
“Dynastic” democracy (Armijo
2011)
Segmentation and
specialization Clear division of labor
Public banks dominate all
sectors
Financial federalism Preponderant federal action National and subnational action
Efficiency Competition with private
institutions/ “Market reserves”
Smaller than the private sector
Low efficiency
Financial repression?
Arguable and less because of the
actions of public banks than for
other credit policies and
economic features.
Yes. Financial system with
spaces in which to deepen and
diversify transactions scopes
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Research. Rutgers - The State University of New Jersey, 1997
Bhattacharya, Saugata and Patel Urjit R. Reform strategies in the Indian Financial Sector Paper
presented at the Conference on India’s and China’s Experience with Reform and Growth.
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November 2003.
Goyal, Ashima. Banks, Policy and Risks. ICRIER Policy Series N° 12, January 2012.
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McKinnon, R. I. Money and capital in economic development, Washington: The Brookings
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