1

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 Please do not cite.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.

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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

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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.

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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

1997 59,4 46,1 78,2 13,8 65,5 6,9 -- -- 29,3 31,3

2000 71,9 53,0 56,8 12,3 47,7 8,5 8,3 12,8 35,1 32,2

2005 74,5 58,4 55,4 10,8 44,9 6,3 3,5 5,2 53,8 66,3

2006 86,6 60,9 50,8 11,2 42,1 4,5 3,5 3,3 65,3 86,1

2007 92,2 60,8 43,7 13,0 35,8 6,9 3,0 2,5 100,3 146,4

2008 96,9 68,2 47,3 13,3 35,9 6,2 3,1 2,3 35,7 53,2

2009 97,5 69,4 44,7 12,2 36,8 4,3 4,2 2,3 73,2 85,4

2010 97,8 71,1 40,0 -- 30,4 -- 3,8 -- 74,0 93,5

Source: World Bank Database

After this introduction, the paper has four more sections. Section 2 briefly presents the pillars

of the debate. Section 3 looks at the role of public banks in emerging countries, more precisely in

Brazil and India, in the past two decades and during the recent economic crisis. The last section

proposes an initial reflection on the similarities and differences of the two cases.

2. The Debate Concerning State-Owned Financial Institutions

The discussion around public financial institutions’ structure, modus operandi, and

effectiveness of action has awakened a keen interest in social sciences and economics. In the

undertow of the wave of liberalization and privatization initiated in the 1990s, the restructuring

and reorganization of national financial systems occurred unevenly, even in regions with strong

economic integration, such as the European Union.

Efficiency of free markets versus state participation: the intense debate

The strong presence of the State setting and executing development policies in the majority

of developing countries is consensual, yet the debate concerning the quality of the actions of the

public sector still raises diverse opinions. Among the State institutions directly inserted into

development policies are the banks, and not simply development banks that were created

specifically to finance public and private productive investment and were responsible for the

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transformation of national productive structures, but also specialized financial institutions linked

to determined social policies, such as rural credit, financing for housing, consumer credit, etc.

Since the 1990s, the notion that all markets should be free became increasingly accepted and

was disseminated throughout the world, acquiring a near-sacred nature in many developing

countries. Nevertheless, and until even the strongest defenders of markets agreed with this

affirmation, there exists a complex set of prerequisites for private markets to be able to function

efficiently. These include guaranteed property rights, respect for contracts, and a well-

functioning judicial system.

During the last twenty years, developing countries applied liberalization policies in varying

degrees, with mixed results. The strategies of quick privatization in countries with low

institutional solidity led to distortion and generated inefficiency, which partially neutralized the

benefits obtained from market openings. It is not strange that, given the mediocre results of

these reforms, proposals for the reassertion of state control and the defense of old populist

strategies are once again gaining strength. More recently, the debate acquired new contours due

to the strong actions of national states aimed at supporting and stimulating national economies

since the 2008-2009 international economic crisis.

Regarding financial intermediation, the discussion can acquire an even more dramatic tone,

owing to the fact that this activity is seen as a fundamental instrument in development policies,

beyond having an undeniable political weight on account of its intrinsic role in distributing

resources for the financing of certain sectors and policies. It is not by chance, therefore, that in

Brazil, the financial system was considered to be a “national security” sector and was also the

last economic sector to be open to foreign capital.

State-owned banks are present in all regions of the world despite their diminishing relative

importance, not to mention the bailout policies in advanced economies after the crisis. If the

diagnoses that led to the implementation of the reforms were correct, privatizing public banks

would lead to better efficiency in their activities, an increase in credit offered, and an improved

distribution of resources.

The existence of state-owned banks is justified by arguments related to development and,

above all, social policies. These institutions should be capable of guaranteeing access to credit to

key sectors and activities for development which could not be sufficiently supplied by the

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market. Specifically, public institutions should be able to do the following activities: provide

banking services for regions that are far away from the most dynamic economic poles; make

credit available to sectors that are vital for development; and execute a countercyclical credit

policy during recession.

At the same time, and following arguments that favor privatization, political control over

public financial institutions would permit certain groups in power to obtain individual benefits,

sometimes to the detriment of development and macroeconomic efficiency.

The contribution of La Porta et al (2002) has been widely cited and discussed as an empirical

confirmation of the inefficiency and ineffectiveness of public banks’ ownership to economic

development. The study deals with data from the 1970s to mid-1990s and does not address the

changes occurred from the processes of privatization and financial liberalization. Its main

objective is not to analyze the public banks’ goals amidst the different development strategies

adopted by less developed countries in this period.

Along with the various political and theoretical considerations and against the backdrop of

fiscal imbalance that many developing countries had been suffering since the mid-1980s, the

privatization of public banks should promote a profound restructuring of financial systems and

give them better efficiency while offering them more credit. However, empirical studies (Micco

and Panizza, 2005 and Yeyati et al., 2005) do not show that in all cases there was a consistent

improvement in these parameters. However, these studies argue that public banks do not

guarantee access to credit to sectors that are deemed necessary for development, such as small-

and medium-sized businesses and the agricultural sector, among others.

The privatization process in Latin America was stimulated and accelerated by events that

originated in the rupture of the established system. These crises began in the period that

preceded the privatizations and were caused by the breakdown of the models of financing

development that had been adopted until the 1980s, installing severe macroeconomic imbalances

and opening up a new era of stabilization policies throughout the continent. The failure of these

stabilization policies deepened the financial dilemma during the 1990s and opened another round

of reforms, including the privatization and opening of national financial systems (Mexico,

Argentina, and Brazil in the early 1990s).

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The experiences with the nationalization of financial institutions vary considerably between

the large emerging economies. Despite not being a central objective of this study, it is

interesting to remember the Mexican case, in which policies of nationalization, privatization, and

“foreignization” were put in place, above all, by macroeconomic urgencies that stemmed from

the economic crises that Mexico suffered during the 1980s and 1990s (Turrent Díaz, 2009).

Faced with deepening macroeconomic crises, development mandates and ‘classical’ public

banks’ functions simply disappear. Sandoval (2011) goes beyond the economic approach,

proposing that banking and financial policies in Mexico from the early 1980s to 2000 responded

primarily to governments’ political needs of specific support and alliances with private sector

groups.

Liberalization policies were established in India in the context of a more general political

reorientation. The scope of the liberalization process was quite broad and inspired by the desire

to make the banking system more market-oriented by reducing restrictions and rules on credit

operations and widening the entrance of new players, namely new private and foreign banks. At

the same time, public banks were allowed to raise money from markets. The measures would

necessarily lead to enhancing competition and increasing public financial institutions’

profitability. The financial reforms in India were gradual and, according to many authors (Shah

et al, 2008; among others), incomplete.

In Brazil, the decrease in the number of public financial institutions was, above all, an

inevitable response to inefficiencies and corruption in the state banks. From 1994 to 2002, the

Brazilian government privatized state banks in Brazil.3 The entrance of foreign banks occurred

around the same period, during which a profound transformation was in course in the national

financial system as a consequence of monetary stabilization and its effects on the functioning of

banks in a lower inflation situation.

Although a general liberalizing wave could be seen in the emerging world during the 1990s,

diverse national characteristics in both the political and economic trajectories of the countries

must be analyzed to understand the space occupied by state-owned banks and their

transformation since that moment.

3 Each Brazilian state had, traditionally, its commercial and development bank.

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In this way, clearly, even considering that there is still a long way to go in terms of research

work, the study of the importance of public banks in large emerging economies reveals important

particularities of each case, many of which are a result of the political evolution of each country.

3. Recent Public Banks Experiences in Emerging Economies: Brazil and India

As briefly reviewed above, there exists vast literature on the contribution of public financial

institutions to economic development – in terms of the reduction of the differential of credit

opportunities between big businesses and small- and medium-sized ones, in financing low-rent

sectors, and in social policies – and on the impact of privatizations on the efficiency of the

banking system. Nonetheless, there is still ample space to expand on studies related to this

subject, especially in the wake of the financial crisis that started in 2008 and led to a series of

state interventions. This action reignited this debate, especially in the case of India and Brazil,

whose public banking and state regulation systems are very significant determinants of financial

sector dynamics.

Important requisites for the functioning of a financial system – of any type and with any

degree of private participation – include the rules and practices of supervision and the guarantee

of deposits. Public banks are subject to these rules, which can vary deeply according to the share

of public institutions in the banking sector and government policies.

In India, the politics of so-called ‘social responsibility of banks’ gave the tonus to the credit

markets since the 1970s. In Brazil, the three federal banks were at the center of all

industrialization and development policies in all times. The dynamics of financing, however,

were profoundly determined by inflation and debt crises, as in other Latin American countries. In

fact, the political and inflationary histories of almost all Latin American countries did not allow

for the creation during the second half of the 20th

century of the institutional bases for the

implementation of solid– and essentially private – financial systems, although with numerous

differences among them. In the absence of desired institutional guarantees, the price charged by

financial intermediaries should incorporate the risk of operating in these markets.

In this context, the private participants in the Latin American financial systems did not

always contribute to the development of the national economies. The public sector maintained

its banks, implementing public policies and accounting for the main development financing,

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namely in the Brazilian case through its development bank, BNDES. At the same time, and in

the case of commercial public banks, they had to reconcile public policies and operations within

the logic of their private counterparts.

The Indian example has many interesting characteristics. According to Armijo (1997), the

nationalization of intermediaries and financial activities was a central policy of the state and was

put into practice shortly after independence and dictated by the ideological orientation of the

parties in power. Policies were defined by the necessity to build national cohesion and loyalty

through use of financial markets as central instruments in development policies. At the same

time, the policy reflected the desire to limit the power of the private sector.

Therefore, it is possible to observe, from the outset, distinctions in relation to the experiences

of Latin America related to the political orientation of their governments. Nevertheless, as in

Brazil, financing of the economy by state-owned institutions in India occurred largely during

periods of industrialization beyond all the possible distortions and problems that this could bring

to the financial system.

During the last decade, the effects of financial liberalization and privatization that many

developing countries had put into place brought the validity of these policies into question. This

paper does not seek to evaluate the main results of the wave of reforms that occurred in the

developing world starting in the 1990s; rather, it seeks to study the role played by state financial

institutions during this period in two countries with industrial economies – even if the degree of

industrialization and the share of public institutions in total banking activities are very different –

dealing with large inequalities and social deficits. In both these countries, public banks

traditionally had primary importance in both development policies and in political relations.

The importance of public banks in developing countries

Despite the fact that their participation has declined since the 1990s, public banks still play

an important role in the financial activities of developing economies. After the financial crisis

began in 2008, keeping in mind the bankruptcy and restructuring of big banks in the most

industrialized countries, the financial institutions of the developing countries assumed better

relative positions in the international financial system. Among the largest banks of the

developing countries were the state banks of the countries under study, as shown in the table

below.

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Table 2. Banks of Developing Countries and Western Banks Present in Developing Countries

Bank

Market

capitalization

(US$ billion)

Global

ranking Country

Industrial and Commercial Bank of China 226 1 China

Construction Bank of China 187 2 China

HSBC 176 5 United Kingdom

Bank of China 145 7 China

Citigroup 126 8 USA

Itaú Unibanco 84 11 Brazil

Sberbank 58 20 Russia

Bradesco 54 24 Brazil

UniCredit 50 29 Italy

BBVA 47 32 Spain

Banco do Brasil 42 34 Brazil

Al Rajhi Bank 33 43 Saudi Arabia

State Bank of India 32 44 India

Bank CITIC China 32 45 China

VTB Bank 27 48 Russia

Standard Bank 23 54 South Africa

ICICI Bank 23 55 India

Source: Selected institutions in The Economist. A special report on banking in emerging markets, 15/05/2010.

Original Source: Bloomberg

The study of state financial institutions requires a previous characterization of these

institutions according to the type of activities that they perform: commercial banks, development

banks, banks devoted toward specific policies such as rural credit, housing, etc. Logically, it

would be expected that state presence would be concentrated in the financing of development

and social policies. In Brazil three main federal financial institutions act as much in commercial

banking activities (Banco do Brasil and Caixa Econômica Federal - Brazilian Savings Bank) as

in social policies (Caixa Econômica Federal, Banco do Brasil in housing, agriculture,

microcredit, small and medium enterprises) and in the most substantive part of investment

financing (BNDES). In the case of India, public institutions (State Bank of India and associates,

plus nationalized banks) are present in various segments of the banking sector and there is not a

clear ‘division of labor’ among specific institutions, although there has been, during the period of

industrialization, a stricter design for some institutions. According to Shah et al (2008):

“In India, financial sector policy has traditionally forced a silo model. Unit Trust of India

(UTI) was a pure (government-owned) mutual fund. Life Insurance Corporation (LIC) was a

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pure (government-owned) insurance company. State Bank of India (SBI) was a pure

(government-owned) bank. Each firm did only one business. In addition, each firm faced

only one regulator. The silo model is in force even today. (…) The effort of the government

has been to reorganize the financial sector into pieces which fit conveniently into the

structure of government agencies.” (p. 166)

The authors affirm that the largest institutions succeeded to grow and built financial

conglomerates with diverse activities and then escaped what proved to be a restraining structure.

The institutions that form the Brazilian financial system were organized following a logic of

specialization by a deep financial reform led by the military regime in 1964. At that moment, the

Brazilian financial system was clearly repressed by limits on interest rates and official credit

policies, which discouraged savings formation and market lending in a context of increasing

inflation rates. Moreover, a lack of specialization and segmented operations of the existing

financial institutions limited credit markets’ development. The ‘economic miracle’ (1968-73)

benefited intensively from the reforms, and credit was a crucial element of household

consumption during the period. The slowdown in economic activity, the end of the ‘miracle’,

and the chronic inflationary process worsening since early 1980s, combined with the external

crisis subverted what could be a normal functioning of financial intermediation.

Since the success of the macroeconomic stabilization programs enacted in 1994, the

Brazilian financial system underwent profound transformations started by the radical change in

its own logic of functioning since the control of the sharp inflationary process. Banks had to

redefine their set of operations, their administrative and institutional size. This movement also

led to the opening of markets to foreign institutions during the 1990s. Differently from the Indian

case, Brazil did not implement a somewhat articulated set of financial reforms in the 1990s. The

changes were being implemented as the necessity arose.

In the wake of the restructuring of the system as a whole, the public banks were also

transformed. They needed to adapt themselves to the new competitive dynamic and reduce

costs. The study of the participation of the public banks in the Brazilian financial system since

1994 clearly demonstrates the reduction of their relative importance in terms of banking capital

and granting credit, among other indicators. These figures illustrate the privatization of an

important group of public institutions, namely state banks, as mentioned above.

Despite the broad movement of reducing direct state participation in the economy which

started since the financial and fiscal crisis of the public sector during the 1980s, the main federal

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banks continued under state control and gradually adapted to the new reality of markets and

maintained the primary positions among the financial institutions operating in the country.

The waves of liberalization had diverse effects in various developing countries as a whole

and particularly so in Latin America. Whereas Chile witnessed decreasing state participation in

the economy, with only 12% of the banking system in state hands by 2000, in Brazil public

banks possess approximately one-third of total net assets in the country’s banking institutions. In

India, this amount remains impressive: public banks possessed, in 2010, about three-quarters of

all net assets in the banking system.

As was mentioned above, most of the Indian banking system remains under state control.

State Bank of India and its associates, for example, have more than eighteen thousand branches,

more than 280 thousand employees, and widen their branches’ net with impressive speed

throughout national territory. The space occupied by the institution in Indian social life is huge.

The institution is among the top 100 worldwide in terms of size of net assets, as is illustrated in

Table 2.4

India possesses a large financial system with different types of institutions.5 Despite having

been relatively developed prior to independence in 1947, the Indian financial system flourished

and solidified following the nationalization of the two largest commercial banks, a process which

occurred in two waves: the first occurred post-independence, during the 1950s, and the second

started in 1969, under the rule of Indira Gandhi (Armijo, 1997).

Since independence, the Indian financial system was the subject of strong control by the

government, embodied by direct control over markets and institutions, programs of public credit,

and intervention in the determination of the prices of financial assets. Common interpretations

affirm that this institutional structure contributed to the establishment of a segmented financial

system and to the exiguity of important markets, such as that of public bonds and foreign

exchange operations. Despite the presence of these inefficiencies, the system grew significantly.

In early 1990s, a wide package of reforms of the financial system was implemented in India.

Many changes were introduced with the aim of bringing greater allocative efficiency to the

markets and to create a large integrated market through the actions of pre-existing institutions.

4 O’Neill, Dominic. India’s state-owned banks compete with private firms. Euromoney, September 08, 2008.

5 Shah et al (2008) propose a classification of firms operating in financial market as fund-based, transaction

oriented and infrastructure financial firms.

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Concretely, India sought to liberalize the different sectors of the financial markets through the

deregulation of interest rates and by stimulating a more market-oriented focus among existing

institutions. Compared to other large emerging economies, the reforms in India were quite timid.

Despite the fact that there was a unanimous perception of the advances introduced by the

institutional changes in terms of financial regulation and diversification, existing literature also

presents an undeniable skepticism relating to the real extent and effectiveness of these reforms.

Bhattacharya and Patel (2003) argue that these reforms were unable to eliminate the inherent

fragility of the system, as inefficiencies remained a dangerous element of systemic risk. The

banking system still has an important volume of non-performing loans, which exposes financial

institutions to the occurrence of crises and demands interventions from the government. Jena et

al. (2004) identify low integration between markets, especially as regards the flow of external

resources.

One must keep in mind that Indian financial institutions, as in almost every country, operate

according to the rules determined by the central bank (Reserve Bank of India – RBI). In the

Indian case, the regulatory framework has been traditionally rigid and has brought considerable

restrictions to the functioning of the financial markets (Shah et al., 2008). Sen and Vaidya (1997)

discuss the background of the early 1990s reforms and show how rules on direct credit restrained

the operation scope of banks – in the majority public at the time – and also reduced degrees of

freedom on the classic monetary policy execution. The establishment of the policy of “priority

sector lending requirements” (PSLR) meant that a large part of the banks’ resources had to go to

specific sectors on precise interest rates. In short, despite the financial reforms and their goal to

make a more market-oriented financial system, numerous restrictions remain in place: reserve

requirements are high, directed credit still represents a considerable part of the banks’ lending,

and barriers to entering the banking sector are high.

Table 3 describes the relative importance of Indian banks by ownership structure. The share

of public institutions is extremely high. There is also a lower profitability of public banks in

relation to private national and foreign ones. A more general look, however, is unable to capture

the specificities of the performance of these institutions. It is true that the State Bank of India,

present in all segments of banking intermediation and throughout the country, shows a

differential in profitability and efficiency in the different activities in which e it participates.

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This institution deserves a more careful study and particularly a comparison to the Banco do

Brasil.

Table 3. Profile of Indian Banking Institutions by Origin of Capital

State Bank of

India and

Associates

Nationalized

Banks

Private

Banks

Foreign

Banks Total

Number of offices 18114 43187 10387 310 71998

Number of agencies (as % of total) 25.2% 60.0% 14.4% 0.4% 100.0%

Number of employees 267332 467262 182284 27742 944620

Number of employees (as % of total) 28.3% 49.5% 19.3% 2.9% 100.0%

Businesses by employee (billions of rupees) 735.52 947.40 798.37 1445.87 873.32

Profit by employee (billions of rupees) 4.65 5.74 7.19 17.09 6.05

Capital and Reserves and Surplus 19.5% 36.6% 27.9% 16.1% 100.0%

Deposits 23.3% 54.4% 17.3% 5.0% 100.0%

Investments 22.0% 48.2% 20.6% 9.3% 100.0%

Interest revenue 23.6% 50.2% 19.9% 6.3% 100.0%

Other revenue 23.4% 38.2% 25.7% 12.7% 100.0%

Interest expenditures 24.3% 53.6% 18.8% 3.3% 100.0%

Operational expenditures 25.3% 40.9% 22.7% 11.1% 100.0%

Wages as a % of total expenditures 17.03 13.65 12.76 23.48 14.83

Return on Assets 0.91 1.00 1.28 1.26 1.05 Source: Reserve Bank of India

Empirical works such as Koeva (2003) show the effects of financial reforms on the actions of

Indian financial institutions. The results point to reductions in market concentration, decrease of

spreads and profitability. In the same way, relationships between profitability, bank ownership,

and institutional restrictions are observed: operations with priority sectors would lead to worse

performance for the financial institution.

Even recognizing the presence of various inefficiencies caused by the public sector

participation in India’s financial system, it is important to study and identify the effects of this

participation in social and development policies. On the side of the boisterous chorus advocating

the reduction of the role of the state in financial activities, it seems pertinent to understand the

extent of these actions and the political forces that legitimize them. Naastepad (2004) points to

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the positive effects of these credit policies that, while imposing lower profitability to the

financial institutions, are responsible for changes in demand, investment, production conditions

and revenue in the whole system.

Goyal (2012) argues that reforms brought some room to improve competition through

interest rate policy and product differentiation. But regulation on interest rates remains high, as

do spreads on banking operations.

Brazilian financial history differs at the origin from the Indian one. It is true that the three big

federal banks were created and changed through times according to political priorities. They

were also pillars of development policies. Nevertheless, Brazil never experienced a process of

bank nationalization like in India.

The reorganization of the Brazilian baking system as noted above led to a very concentrated

market, in which public sector banks detain a very large share, as show Tables 4 and 5. Among

the five largest financial institutions in Brazil – considering the amount of total assets in

September 20011 – three are federal banks.

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Table 4. Size and Performance of the 15 Largest Brazilian Financial Institutions,

September 2011

(in R$ million)

Institution Ownership type Total Assets

Total Credit

Operations

(all types)

Total

deposits Net profit

Number

of

branches

Basel

Index

BB Public Federal 907.743.033 377.138.941 420.159.382 2.917.937 5.156 14,5

ITAU Private National 810.464.986 279.459.945 236.857.142 3.820.013 3.796 15,1

BRADESCO Private National 636.399.735 229.307.022 225.352.433 2.820.175 3.953 15

BNDES Public Federal 567.894.785 195.871.993 21.163.632 2.587.126 1 21,6

CEF Public Federal 507.306.734 227.029.335 256.713.185 1.291.175 2.252 13,4

SANTANDER Private Foreign Contr 422.407.010 165.838.701 119.942.787 880.656 2.449 24,2

HSBC Private Foreign Contr 152.265.999 46.936.409 75.681.770 469.435 868 13,4

VOTORANTIM Private National 127.354.340 59.516.740 24.965.585 -85.313 34 12,7

SAFRA Private National 89.106.267 39.546.969 16.936.365 303.689 103 12,7

CITIBANK Private Foreign Contr 62.329.592 12.981.270 16.609.709 354.698 128 17,5

BTG PACTUAL Private Foreign Partic 59.516.071 4.983.623 14.782.056 173.372 6 21,3

BANRISUL Public State 36.785.420 19.058.166 21.176.742 239.270 440 15,5

DEUTSCHE Private Foreign Contr 33.511.938 1.292.377 2.816.224 93.365 2 13,4

CREDIT SUISSE Private Foreign Contr 28.214.734 2.511.012 3.411.411 124.268 2 22,4

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.

17

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.

19

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.

20

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

21

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

22

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