There is no god-given right to any democratically elected government to misuse the public money. Nor a government can run institutions that have proved their ability to lose money consistently for decades. The survival of such entities should be left to market-competition, not to the mercy of public exchequer/taxpayer. The biggest case in hand is India’s government-owned public sector banks (PSBs) which have excelled in the art of draining public resources.
No government, whether the UPA or NDA or the mighty Reserve Bank of India (RBI) have been able to make any notable progress so far in improving the operations of PSBs. These banks still struggle to do their basic job i.e. lend money and get it back with interest. The question here is despite this proven inefficiency in managing state-run banks, which control 70 percent of the banking industry, why Indian government is still holding on to their public sector ownership? The question, in the current context, should be logically directed to the incumbent, the Narendra Modi government.
It wouldn’t be an exaggeration if one says that India’s state-run banks are on the verge of a crisis. Over 90 per cent of the total bad loans of Indian banks (currently stands over Rs 3,00,000 crore) is on the balance sheets of these entities. Their restructured loan portfolio would be nearly double this amount, if one goes by industry estimates. These two categories together, termed as stressed assets, would make up around 11-12 per cent of the total bank loans given.
But, that isn’t all. There is good chunk of bad or near-bad loans banks haven’t disclosed even yet, fearing provision requirements and bad name. No one has any estimate of these hidden bad loans since banks often latch on to technicalities to show they are performing (or the money is coming back), even when they are not. Every outgoing bank chief of government banks religiously cover up the bad loans at that point in time and pass on the provisioning burden to their successors, who, in turn will do the same to their successor. That chain goes on.
This is a reason why RBI governor, Raghuram Rajan, brought in stricter norms of early recognition of stress in assets, stopped restructuring of loans with RBI dispensation and put a deadline of March 2017 to banks to declare all their bad loans (or in other words clean up their balance sheets. Also, the amount of written off by banks have been huge. According to an Indian Express report, which has received information from RBI on an RTI, state-owned banks wrote off a total of Rs 1.14 lakh crore of bad debts between financial years 2013 and 2015, much more than they had done in the preceding nine years. The report quotes the figure shooting up from Rs 15,551 crore in the financial year ending March 2012, to Rs 52,542 crore by the end of March 2015.
What the NDA has done so far?
The Modi government launched ‘Indradhanush’ package for state-run banks last year as per which these banks will be given Rs 70,000 crore capital, initiated HR reforms and measures to enhance efficiency in operations with the government staying away from their operations and gradually bring down stake in these entities. There have been some steps taken such as splitting the posts of chairman and managing director and looking for private sector talents to lead government banks.
But, the point is these small reform steps have hardly translated into the larger issue of promised autonomy in their operations, which still remain a pipedream for banks. The solution, as Firstpost has highlighted several times in the past, is to privatise these banks, ensuring that the ownership gets diversified and do not fall into the hands of a few parties giving room for misuse. To carry forward with its social sector agenda, the government can retain ownership of few large banks such as State Bank group, with widespread network and leave the rest out of its direct control.
How did NPA worsen in PSBs? The answer lies in a mix of factors including reckless lending to large corporations for several years, putting volume-business, not the quality of assets and, finally, the vulnerability of public sector banks to crony capitalists, who use banks to their advantage using the infamous political-corporate nexus. For any government, it is difficult to control such nexus since all political parties are directly or indirectly the beneficiaries of the same corporations for political funding.
Burden of populist schemes
Secondly, the government continues to treat these entities as their extended arms. The rollout of any government schemes or any populist measures instantly become the primary responsibility of these entities (There are many examples: 2008 farm loan waiver, 2014 Jan Dhan Yojana and so on). This impacts the performance, credit assessment and, finally, profitability of state-run banks. These banks are also forced to do directed lending to risky projects, where private sector banks take little interest generally (for example long-gestation infrastructure and power projects). One must remember that a big chunk of restructured loans, are from infrastructure and power projects, are on the books of state-run banks. As against this, private sector banks focus on quality of assets and profitability.
Given that the banking landscape has changed in the last one year with the RBI opening doors to dedicated banks to push financial inclusion—payments banks and small finance banks, it is time the government gradually let go of its hold on large state-run banks and provide them private sector character. Any social sector initiatives can be rolled out directly through bank accounts but not forcing banks to use their resources for the same.
If one takes a broad range, the government holds stakes ranging from 56 percent to 84 percent in 27 state-run banks. To be precise, the government has more than 70 percent stake in 12 state-run banks. This promised capital infusion is inadequate since banks requirement is much higher if one takes into account the Basel III requirements, provisioning needs on bad loans and the money needed for further credit expansion.
Once the government frees the public sector banks from the ‘public sector tag’, the responsibility of feeding these banks with large capital infusion every year will no longer be the budget responsibility. The government can use that money for other productive use. Then, the onus of finding money to survive will be left with individual banks. Those who run their books well, will survive, others will gradually perish or reduce themselves to shadow banks. It doesn’t make any sense for the government to hold on to their ownership. It’s too big a problem for the government to handle now.
Data from Kishor Kadam