Editor's note: This is the second article in a two-part series on the 50 years of nationalisatation of banks and the negatives that emerged post-bank nationalisation.
The nationalisation of banks was probably one of the boldest steps taken by the government in 1969 as the decision had many motives including bringing about balanced economic development and resolving the unemployment issue. Besides extending banking services to all the citizens, the move had also created a heap of negatives that can be enumerated.
First, government ownership meant a lack of responsibility and the culture permeated the working of these banks where there was little obeisance paid to efficiency.
Second, bankers were always chasing targets in loan disbursements which became the ‘be all and end all’ and hence never bothered about the quality of assets.
Third, political interference and patronage became a part of the culture where various leaders used banks as their personal treasuries and directed lending to related parties.
Fourth, loan melas, which were elaborate loan disbursal schemes, were launched periodically so that certain sections of the society could get loans. Normally, they were targeted at the lower strata so that it helped create vote banks.
Fifth, in the name of employment, several layers were added without any link with business levels.
Sixth, as the banks were owned by the government the pay scales were more or less aligned with the central pay scales (even though they are technically not linked). The problem here was that this led to the public sector banks (PSBs) being the last choice for well-qualified personnel who preferred to go to foreign banks to begin with before reforms and the private banks post-reforms.
While these were the operational difficulties for these banks, the rot set in when there was an even higher level of interference in their operations. To begin with, the chairman and managing directors (CMDs) or chief executive officers (CEOs) were political appointments and while tenure was important, the casting vote was with the political bosses as the government owned the banks.
With the change in governments, the CMDs would be shifted to the lower level of banks and hence the revolving door threat made bankers insecure. This insecurity got heightened when the non-performing asset (NPA) issue came up as being in the public sector meant that banks were subject to all kinds of audit from the Comptroller and Auditor General of India (CAG), Central Bureau of Investigation (CBI) and Central Vigilance Commission (CVC) which came in the way of decision-taking. This was never a challenge for private bankers.
Notwithstanding the fact that the PSBs today have the negatives of low profits, high NPAs, governance issues, political interference, dependence on capital from government etc., the way they have shaped up compared with the private banks has been impressive.
For example, the term loans to total advances in FY18 was 53.5 percent (66.8 percent for private banks), deposits to total liabilities 82.3 percent (70.1 percent), secured advances to total advances 85 percent (76.6 percent), wages to total expenses 14.8 percent (12.4 percent), intermediation cost to total assets 1.66 percent (2.19 percent). (Profitability ratios excluded as this was a year when profits were negative due to high provisioning).
Also, the PSBs have taken up technology quite well with core banking now virtually omnipresent. Employee efficiency too has improved and comparable with that in private banks. Also, they have been more economical with staff count and have reduced the non-officer category. Interestingly, in the last 10 years, while headcount increased by 1.18 times and that of officers went up by 1.18 times while that of non-officers came down to 0.97 times in FY18.
Therefore, the overall picture is mixed and if one were to be dispassionate, it can be argued that we need to retain the PSBs with modifications in their functioning as their contribution has been very satisfactory while their operations can be improved with principles in place.
The problems with the nationalised banks or PSBs as they are called today are not so much with the public ownership but their governance. While the government can continue to own the banks, the management must be made professional with selection processes going through the Union Public Service Commission (UPSC) like structure so that it does not come under the realm of the government directly.
Today, with the finance minister deciding finally on the selection there would tend to be the ingratiating culture that follows. Further, for talent to be brought in pay scales must be made open for banks depending on their ability to pay. This would also mean a one time mark up of existing pay which can be done by linking with performance-related structures.
With the staffing issue sorted, there must be autonomy in operations with the CMD/CEO being made to deliver a certain top line or bottom line with safe NPA ratios. The business part must be left with the management. Further, any government programme like Jan Dhan should get compensation from the Budget if there is a net cost involved, which can be worked out before banks give a buy-in. This will ensure that the PSBs are not just a tool for delivering political agenda and are incentivised to do so.
The government should then be in a position to ask the banks to perform to qualify for extra capital which will make it a merit-based system. Therefore, reforming PSBs is not really difficult if the government is willing to steer clear from operations. This also includes the finance minister not calling the CMDs before or after a monetary policy committee (MPC) meet and ordering them to change interest rates. This should be a call of the individual asset-liability committees (ALCOs).
The important thing is that as we have in place a strong infrastructure of the PSBs, it should be leveraged to the advantage of the nation. This may be the best time to do so as the legacy issue of NPAs has been addressed so that they can literally start from a new page. A lot of government ‘will’ is however required.
(The writer is chief economist, CARE Ratings)
Updated Date: Jul 24, 2019 10:36:58 IST