Bank privatisation: FM Arun Jaitley just proved Modi govt isn't yet ready for bold reforms

The response from Union finance minister, Arun Jaitley, to a question on bank privatisation at the Economist India Summit in New Delhi, shows the thinking within the Narendra Modi government on radical, but unpopular economic reform steps.

“I don't think that public or political opinion has converged to the point where we can think of privatisation in the banking sector," a Reuters report quoted Jaitley as saying on Wednesday.

“To reach a particular level of reform, you have to evolve into that stage of public opinion... In funding a large part of the social sector in India, public sector banks, despite competition, had a far larger contribution,” another report, in Business Standard, quoted the minister as saying.

Finance minister Arun Jaitley

Finance minister Arun Jaitley

What does it tell us about the reform intent of this government on areas where it doesn’t have public support? The doctor simply doesn’t want to administer the bitter pill needed to cure the rot within the body until the patient okays it. But, in the process, the patient’s health can only turn worse, not improve. Jaitley’s comments disappoint those who look at the government’s willingness for radical reforms, which is what it promised when came to power in May 2014 with a historic majority. This also explains the government’s reluctance to address politically sensitive labour, land reforms too.

Doing the right thing at the right time, no matter what the public opinion says, is the real bold reform. This website has long argued why it is high time the Narendra Modi government bites the bullet on privatisation. But, so far the government doesn’t even have a clear roadmap to let go of the ownership of state-run banks, except in the case of IDBI Bank and internal merger within SBI group.

Why should the government privatise state-run banks? The answer is simple. It cannot keep pouring in taxpayer money to keep these banks alive, many of which have broken balance sheets and serious issues on efficiency and governance. Presently, a crisis is silently building up on the balance sheets of some of these banks with huge chunks of Non-performing assets (NPAs) emerging after the Reserve Bank of India (RBI)-forced bank clean up exercise.

It showed that some of the state-run banks have NPAs unacceptably high on their books (for instance Indian Overseas Bank with 20.48 percent Gross NPAs). There are at least fifteen more state-run banks with gross NPAs above 10 percent which include UCO Bank (17.19 percent), United Bank of India (14.29 percent), Punjab National Bank (13.75 percent), Central Bank (13.52 percent) and Bank of India (13.38 percent).

Many of these will require substantial amount of capital infusion from the government. The bigger question is how much of these funds, which ultimately use the taxpayers money, come back to the system in the form of productive lending. In the past nine years, the government has infused Rs 1.18 lakh crore in these PSBs. Or are we continuously throwing good money after the bad? This year, the Modi government’s move to front load the annual capital infusion in PSBs (it recently infused Rs 22,900 crore out of the Rs25000 crore promised) may have come as an immediate relief for state-run banks, but it is only a painkiller, not a cure for the ‘begging bowl syndrome’ of these lenders or, in other words, ceremony of lining up before the North Block every year to get government funds.

The ongoing NPA clean-up may clear the mess for now, but there isn’t any guarantee that the cycle will not occur yet again because the fundamental problem lies in the functioning style of these banks. Often, the state-run banks operate as departments of government with a unwritten, untold mandate to do be the vehicles of government’s social sector, populist schemes. It doesn’t augur well for banking sector which is the backbone of the financial system.

It is doubtful whether this government has any solid plan to deal with the NPA problem in state-run banks and the subsequent massive requirement of capital by these banks. Under the ‘Indradhanush’ revival plan the government came up with to revive PSBs, the government plans to infuse Rs70,000 crore in the four-year period between 2015-16 and 2018-19 in the state-run banks. But, the government shouldn’t ignore the caution from analysts and rating agencies that this money is too little given what the requirement of sarkari banks, besides meeting Basel-II capital norms, these lenders also need to find money to NPA provisioning and credit expansion.

ICRA had estimated that the equity capital required by PSBs would be in the range of Rs 40,000-50,000 crore, indicting that the government will need to increase the fund infusion significantly for 2017-19. Similarly, Fitch too said the same. “Fitch believes pressures on public bank credit profiles will remain, and more capital than the Rs 70,000 crore earmarked through to FY19 will be needed from the government to restore market confidence and position the sector for long-term growth.”

Given their cracked balance sheets, these lenders (except few bigger ones) are unlikely to manage to raise funds for themselves. They will continue rely heavily on state-exchequer for survival capital. If sufficient capital doesn’t come, these lenders will be eventually reduced to zombie banks that do no particular business, but merely survive on government support. Such banks will not augur well for the Indian economy aspiring for a high growth phase. Absence of credit flow to small and medium firms on account of the huge NPA problem has already created a stalemate in that segment.

Nationalisation of banks in 1969 was done with the intention of inclusion of the underprivileged, unbanked segment of the population. As Jaitley has pointed out they have done their part in reaching out the poor, albeit in a slower pace. But there is no rationale on holding on to the ownership of 27 such banks (in some of which government has over 75 percent stake). This is particularly important in the context of new payment, small finance banks taking over the rural lending part (by design they have to cater to the economically weaker population) and also due to the fact that despite several decades of nationalization, most PSBs have failed to survive on their own.

The bottom line is this: It will be too late if the government waits till public opinion to turn in the favour of privatisation. The true spirit of bold reforms lies in doing the right thing at right time no matter what the public opinion is.

Data contribution by Kishor Kadam

Updated Date: Sep 08, 2016 16:25 PM

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