Economic Highlights

New Delhi, 10 January 2015

PSBs Functioning

VICTIMS OF THEIR OWN MAKING

By Shivaji Sarkar

The averment of Prime Minister Narendra Modi and Finance Minister Arun Jaitley about non-interference in bank functioning has been praised. It should be. While it is true that there had been political interference but the stand of the banks that their woes were for this reason is not the whole truth.

The bank officials have largely functioned independently. The recent arrest of the topmost bosses of Syndicate Bank is symptomatic of the disease that has set deep in the entire system. They rather welcome some political interference. It helped them further what they independently did.

The public sector banks have the problem of too much of discretion. The small depositors are discriminated, levied charges and fees what is not ordained. They deduct charges on cheques, which they themselves fail to realize. In short, they earn for not being efficient. They have raised charges for all their services. They did not seek any political clearance for that.

Even there are many recorded incidents when despite orders from political quarters, they refused to obey it. Even some political leaders rue that the bank officials come out with excuses for not extending a service to a client. They would quote rules but would not cite one. Since there is a new dispensation, like any other bureaucracy, they have been blaming the previous political dispensation.

The PM’s recent meetings with public sector bank (PSB) management show the NDA government is keen on correction.

The PSBs, however, need to go beyond it. The PSBs have silently witnessed systematic destruction of their balance sheets. The non-performing assets (NPA) and debt restructuring – done at the discretion of the banks – have phenomenally increased. This has happened at a time when there was supposedly a slowdown. How come banks started squandering away their huge deposits? How come the beneficiaries were large companies? Is it also not a fact that during this period of slowdown the number of consumer loans were fewer?

It only speaks of the not so responsible manner the PSBs had been functioning. Everyone knows that banks rarely take a risk at the beck and call even of the highest political quarters. One only needs to have common sense to understand how it happened.

The NPA was around Rs 1.4 lakh crore till 2009 almost double that was about three years back. In 2012-13, it was at Rs 1.55 lakh crore, 2013-14 at Rs 2.04 lakh crore and currently at Rs 2.36 lakh crore. The figures indicate the process the banks were milched. The PSBs apparently forgot that the money did not belong to them and they were mere custodians of largely poor man’s money.

These numbers were cited as results of a ‘slowdown’. The truth was that PSBs lent to large groups. The arrest of a bank chairman for taking bribe indicates a deep malaise of the banking system. The banks till about three decades back were known for their honesty. It has eroded during the era of liberalization.

The political system certainly did not treat this as disease. The UPA Government has been in a mode of denials. In 2012, it told Parliament to a question on rising NPAs, “did not necessarily mean any systemic vulnerability”. It was a surprising answer though any economist understood the danger.

Finance Minister Arun Jaitley responding to a similar question on December 2, 2014 told Parliament: “The Government is conscious of the need to restructure PSBs in India. Various options are being examined with a view to arriving at the most optimal solution which caters to the need for re-capitalisation as well as making banks more efficient”. That is a major change that has happened now.

It indicates that the PSBs were having political protection and not interference. The PSB officials it seems were in league with all those who were keen on eroding them for bolstering reserves of the unscrupulous.

The new government is apparently bringing that change. Taxpayers are no more willing to fund for their inefficiency that “recapitalization” denotes. It is double whammy. The depositors get low interest for the benefit of large unworthy borrowers. Their taxes are utilised to refinance the losses – NPA – the PSBs suffer.

This is aptly echoed by RBI Governor Raghuram Rajan recently. He said: “In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its workers, along with past bank loans are hostages in the game of chicken – the promoter threatens to run the enterprise into the ground unless the Government, banks and regulators make the concessions that are necessary to keep it alive”.

The not so honest bank officials and the large defaulters are eroding the banking systems. The statement of both the Prime Minister and the Finance Minister has to go beyond interference. The NDA Government has to build up a system so that not only what has been lost as NPA is realised from the largest borrowers but it also ensures a protective system for bank funds. If that means creation of a new entity to keep a check on them should also be mulled.

The Government also needs to lay down rules for re-capitalisation. It cannot be a routine affair. The conditions should include verifying the balance sheet, actions of the PSB officials and provisions of penalty for willful misdeed. Re-captialisation through budgetary provisions should be done only if it fulfils a government objective.

The Government should also make big borrowers accountable. They should not be allowed to either blackmail or be forced to provide service at their whims. Their pleas of such provisions affecting their business should better not be heard.

The banks cannot be allowed to be pawn in the hands of select group of large borrowers. Nor the PSB officials should be seen developing close nexus with their clients. This leads to concentration of risk and severe erosion of national wealth.

The banks have to be managed more efficiently. It would be possible only when the system functions that way. The banking system is most vulnerable and the autonomy being given by the present Government has to ensure that PSBs are not imperiled either by bank officials, big borrowers or the financial market. An onus on the PSB official is the best insurance. Else it may be a serious crisis. ---INFA

(Copyright, India News and Feature Alliance)