Rajan, Acharya may be off mark: PSU banks need strategy and focus to survive, not privatisation as remedy

The PSU banks' problem is often linked to India's burgeoning fiscal deficit that needs control because pumping taxpayer money into state-run banks is fraught with risks.

Madhavan Narayanan September 22, 2020 13:22:46 IST
Rajan, Acharya may be off mark: PSU banks need strategy and focus to survive, not privatisation as remedy

Image courtesy Indraprakashinfo/Wikimedia Commons

It is interesting that two of India's biggest brand-name economists, former Reserve Bank governor Raghuram Rajan and former deputy governor Viral Acharya, have spoken for the "re-privatisation" of public sector banks even as the nation debates a controversial couple of agriculture reform bills splitting the political class. As we shall see, the twain may well be inter-linked.

As it happens, the rockstar economists (Acharya literally wields the guitar as well as an amateur musician) are officially ensconced back in their chairs in US academia. They may well be far removed from both India and its political economy though they do have their logic. They are speaking more from the orthodoxy of market economics in full-employment economies and its implicit ideological baggage in saying what they did. No doubt, in a globally integrated economy such as India with a substantial market to maintain, their words ought to carry weight.

But it is equally important to understand the context of India as a developing economy to get their views distilled for local application. Global thumb rules of market economics do not apply easily in a vibrant economy of 130 crore people dependent on vagrant monsoon rains.

Reports on the paper the two economists have authored says a "select" few PSU banks may be privatised. It is not clear if they intend this only as part of a structured solution with a focus on ownership — which is not a bad idea — or whether they want a situation where all state-run banks are intended to be privatised.

The latter carries a bit of market dogma that needs to be questioned -- just as we question the state dogma of Nehruvian economics. Market allocation of resources leads to efficiency and profitability, but not necessarily social welfare or political stability -- which in turn can influence market conditions. In India's here-and-now political economy, they are all linked.

The conventional wisdom of privatisation is that the state should not be running companies, and the market knows how to allocate resources, and taxpayer money should not be wasted. Add to this the logic that there are bank frauds, and a mounting pile of bad loans (non-performing assets), and we have a nice case for a PSU bank sunset.

But things are not so simple. Remember that after the global financial crisis of 2008, under its Troubled Asset Relief Program (TARP), the US government bought preferred stock in eight private banks: Bank of America/Merrill Lynch, Bank of New York Mellon, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, State Street, and Wells Fargo. This logic of too-big-to-fail even in the haven of capitalism shows that the state cannot be wished away.

In such a context, demands from the economists that the Department of Financial Services in India's finance ministry should not exist simply does not wash. The financial system can be regulated by an RBI or a Securities and Exchange Board of India (SEBI) but what the companies and institutions under them do or don't can affect the fortunes of ordinary people and those they hold accountable -- their political administrators. India's Constitution promises both economic and social justice to its citizens, and it is difficult to imagine how the market can take care of that automatically.

When the then prime minister Indira Gandhi nationalised a number of banks in 1969, her objectives were not merely economic but also social. The twain met in the political. While criticism of corruption or "loan melas" in which ministers handed out loan cheques to the poor may be justified, it does not mean that social objectives were not met. "Priority" sectors such as agriculture, small industries, and housing got special attention under the "development banking" tag. It is too early for India to write off such objectives.

If Wall Street can collapse as did in 2008 and bounce back, there is no reason why India's public sector banks cannot deserve another chance. Remember, Donald Trump got elected as US president because Wall Street or Silicon Valley could not solve unemployment problems in the Rust Belt.

In India, HDFC Bank and its parent the Housing Development Finance Corporation (HDFC), are stock market darlings because they go after retail and loans to help the urban salaried class. But large real economies don't run on such principles. Development banking needs a risk appetite and a recognition that social impact should also be measured and pursued.

In post-1991 India focused on liberalisation, the logic of private profitability has overpowered that of social outcomes. In the current context of two agriculture bills being passed to integrate farmers with the market economy, it must be remembered that farm and food credit are important ingredients for everything from crop loans to storage facilities and management of inflation. In the coming days, farmers may even require substantial marketing help. Banks ought to be catalysts in the process. Private sector banks do not have the capital, risk appetite or social concern to do it on a large scale, although emerging entities such as the small-business focused Bandhan Bank are trying to.

Rajan Acharya may be off mark PSU banks need strategy and focus to survive not privatisation as remedy

The PSU banks' problem is often linked to India's burgeoning fiscal deficit that needs control because pumping taxpayer money into state-run banks is fraught with risks. There is no doubt that PSU banks need checks and balances. Some of the holes need to be plugged everywhere. As we can see, even ICICI Bank is now caught up in a high-profile fraud case. Bad loans or corruption can happen anywhere.

PSU banks need effective supervision. But more importantly, they need a strategy that recognises both economic efficiency and social impact. What has happened over the past three decades is that state-run banks have adopted a me-too strategy in mimicking private sector banks in going after retail loans and broad-based lending. They are now falling between the two stools of consumer and development banking.

Real banks need to specialise on sectors and activities. There is certainly a case to privatise some state-run banks, but this ought to be accompanied by nurturing chosen public sector banks to do the development work in building a vast market, as distinct from chasing the market that private banks do.

The writer is a senior journalist. He tweets as @madversity​

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