Banking mess: Narendra Modi regime should have a strategy to deal with PSBs, which is missing now

There is a growing cry for the privatisation of public sector banks (PSB), which is also echoed by both private sector banks and NBFCs. This is indicative of their interest in taking over a PSB with the infrastructure and business book, which helps them gain scale.

There are four strong reasons advocated for the same. First, the recent issue of fraud in one PSB has been blown up to be a systemic problem with all of these banks, which is not right. This is so as frauds occur in all banks and even the private sector and foreign banks have not been insulated from such attacks in the past. In fact the counterparty to this fraud were also private banks where their systems did not detect anything amiss for years and hence such lacunae was not confined to PSBs. Therefore, bracketing PSBs with easier fraud due to faulty systems is incorrect.

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A file photograph of a man sitting outside an ATM counter of the State Bank of India in Kolkata. Pic courtesy: AFP.

Second, the NPA problem which resides in large numbers in PSBs has been used as another justification for privatizing them. The argument goes that most of these NPAs have come up due to a combination of governance issues and incompetence. However, if governance is an issue, the solution is not with ownership and the solution is to ensure that these banks are run independently. We do not need to have a private badge to address the issue. On the issue of competence, NPAs have come up in private banks too and the magnitude is higher for PSBs as they have taken more risk by lending to critical sectors like infrastructure, in the absence of which growth would have been affected. Again the solution is to hire the right people and hence merely changing ownership will serve little purpose.

Third, the government has also been talking of privatisation but keeps blowing hot and cold on the issue. The reason is that privatisation will help it garner resources which can be used to handle the budget. However, it is not willing to go below 51 percent, which makes it less attractive for a buyer. But this argument is acceptable as the objective is more on the money to be generated rather than the character of the bank. But such privatisation will not address the other issues of governance or competence as it only brings down ownership of the government but existing pattern of operations continue. In fact, there may not be too many willing buyers.

The last argument is that the government should not be in areas that run on commercial lines. This follows from the school of thought which believes that governments are good in spending but not in running enterprises as they are inefficient. However, if this is the case, then the government can simply withdraw from their operations in every way and give them freedom to work as autonomous entities. Banks should be allowed to have differential pay structures and also given the freedom to rationalise branches and staff. This would mean that the management would be selected from within and the government has no say on the appointment of the Board of Directors – we may also not need a Banks Board Bureau which is implicitly determined by the government. If the government can take this posture, then privatisation is not required. In fact, since privatisation would anyway keep the government out of the running, it could do the same by just keeping off their operations. Is it willing to do so?

In fact if these ideas are put together, the question to be posed is why cannot the government just keep these banks and let them operate on their own. Privatisation will mean consolidation of branches and rationalisation of staff, which cannot be avoided. No fund or enterprise will be willing to buy a PSB without freedom in these domains. There will be the usual clause that for the first three years jobs are retained, after which the acquiring bank has the prerogative to lower staff numbers. The same rule can be applied even now by empowering the management to do the same. Further, Board members' selection can be made more independent so that the government has no say here. Pay scales too can be made open as this would naturally follow once a merger is permitted or a private party buys 51 percent stake. Therefore, one does not have to privatise to get in the work ethic.

At another level, it should be remembered that several development objectives of the government were attained due to these banks being there. Infrastructure development can be largely attributed to these banks which provided the funds. Interestingly, the private banks maintained lower NPA ratios by lending to less vulnerable sectors such as retail. If all banks played safe and lent to the more performing sectors, growth in the economy would have been thwarted. In fact, this is a challenge today when PSBs also prefer retail loans to corporate lending. If all banks took such a stance, then investment funding would be a problem.

Further, at the practical level, all governments have used these banks to further their socio-development programmes. The Jan Dhan programme for instance, which is a high cost financial inclusion scheme has been virtually forced on PSBs as private banks account for just three percent of accounts opened. Is the government willing to lose this control over the banking system? Further, loan waivers are politically expedient and such schemes can be implemented seamlessly only when the state is the owner of the bank. Would this be acceptable to the governments of the future?

The problem is that the government wants to retain control of PSBs by not going beyond 51% and is not prepared to give autonomy in creating independent structures to the PSBs. At the same time it wants to use them for running national level programmes and also wants them to perform. How can this happen?


Updated Date: Mar 19, 2018 15:30 PM

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