Economic Highlight
New Delhi,
14 June 2021
Bank
Sales & Middle Class
FOLKS
HIT, RETHINK APPROACH
By
Shivaji Sarkar
The middle class is
supposed to be the backbone of the Indian economy. It is shrinking and in the midst
of it, the government chooses to announce sale of two major public sector
banks, Central Bank of India (CBI) and the Indian Overseas Bank (IOB). Should
India privatise critical assets when it needs the finances most? The sales instead
would be used for one-time financing of budgetary deficits.
Both the banks, like
many other public sector banks (PSB), have shown improvement in their balance
sheets of late and no sooner their privatisation is announced got impressive
quotes at the stock market. On June 8, shares of
Central Bank and IOB soared 7 to 14 per cent soon after Niti Aayog
announced their privatisation. Both the lenders are currently under the prompt
corrective action (PCA) imposed by the Reserve Bank of India (RBI) and have
shown marked improvements. This shows that the market is ready to lap up
assets worth Rs 9.7 lakh crore -- CBI Rs 3.56 lakh crore and IOB Rs 2.44 lakh
crore. Another asset of United Insurance is Rs 3.7 lakh crore -- a good sum for a race to a multi-trillion
dollar economy.
The banks’ health is
mysteriously linked to the growth of the middle class. Since 1969
nationalisation of banks for development purposes has helped both the banks and
the depositors, largely from the middle class. As they grew, so have the bank deposits
and industrial and economic activities risen. But as the middle class got a
jolt after the 2008 Lehman Brothers meltdown due to incentivisations by the UPA
government causing erosion in bank assets, because of non-payment of huge sums
(over Rs 50 lakh crore by large lenders i.e. corporate), shrinkage of jobs and
activities the middle class took the hit.
This has been
exacerbated by the introduction of a low-interest, high prices and
high-tax-on-deposit regime. This may marginally buff-up government revenue figures,
but has caused impoverisation of the middle class. Majority of this class is paying
income tax on a skewed higher income as interest were not considered as hedging
against inflation but unwisely as “income”. This erodes savings. The process
started during the UPA and the NDA never heard or paid heed to the people’s
pleas. It condescended by 2018 with the middle class slipping. This and the
poor were also hit by unwise demonetisation that had shaken the economy in 2016,
when it was just about turning around.
The Pew Research Centre
is now looking into the severe pandemic lockdown and says that 33 million (3.3
crore) people during the last one year have slid into poverty of a 99 million (9.9
crore) supposedly middle class, defined as people with $10 to 20 a day earners.
Its report states the poverty rate in India rose by 9.7 per cent in 2020, up
from January 2020 forecast of 4.3 per cent and projected to have reached 134
million (13.4 crore). If food dole is a standard, then the pandemic has hit 80
crore people. Despite large bankisation of the poor, the banks have not got
that boost in actual deposits though the operational cost has increased
manifold.
The size apart, the
class that is stated to be the key to growth has now lower incomes and capacity
to consume and savings are down. The first officially declared recession has
left its middle class fearful of future.
This means the future
growth would be delayed and if instead of corrective steps, banks that were
nationalised with great ‘political will’ are sold back to the private, it would
mean social assets would decline, leading to further economic chaos. Often it
is justified that PSBs are unable to cope up with private banks. This is a
misnomer.
India’s private banks
such as Axis, ICICI, HDFC and others have a record of being eroded by its own
bosses. Axis has asset quality problems, ICICI was moth-eaten by its Chief Executive
Chanda Kochhar and HDFC was fined Rs 10 crore for wrongfully selling third-party
non-financial products to its auto loan customers. There are many complaints
against HDFC insurance as well. By privatising some of the biggest financial
institutions, would the nation be forcing these also to go the unethical chaotic
way?
It musn’t forget that
during demonetisation and the pandemic, the PSBs have given services to the
people, even with a dwindling number of employees. The CBI has 33,481 employees
in 4685 branches, IOB 26334 in 3400 branches and UIA 14,322 in 2271 branches. Once
privatised, one-third or more of their employees would lose jobs.
Despite
the PCA curbs, both lenders have managed to grow their loan books. Central
Bank’s gross advances rose nearly three per cent between March 31, 2020 and
March 31, 2021 to Rs 1.77 lakh crore. IOB’s advances stood at Rs 1.37 lakh crore
as on December 31, 2020, up two per cent year-on-year.
Being State-owned
banks, they continued to enjoy the trust of depositors despite being under PCA.
Central Bank’s deposits grew over five per cent in a year to Rs 3.3 lakh crore
as on March 31, 2021 and IOB’s deposits also increased by a similar degree to
Rs 2.34 lakh crore as on December 31, 2020.
Since
nationalisation, the Indian banking sector expanded at an unmatched level but
it made banks prone to political interference for many purposes including the
2008 incentivisation of the rich corporate or Jan Dhan accounts that raised
operational costs. Largely, the financial woes of the PSBs are not due to
corruption and nepotism. Many loans of banks such as Bank of India, Punjab
National bank, Bank of Baroda, Axis bank and IDBI Bank were written off to
shore up balance sheets. The quantum of PSB loan stood at Rs 32,853 crore
higher than recoveries of Rs 23,894 crore. Such figures are gradually coming
down.
This also
does not justify the process of privatisation. Even the United Insurance is
preferred to most private insurers as its claim settlement process is more
realistic and ethical.
It is not
easy to create Rs 10 billion asset. It might go to one or the other defaulters?
Instead, retaining the asset would help government create these more economic
activities and boost jobs. An empowered middle class with lower taxes and TDS exemptions
on their deposits can do wonders. Mere change in approach could strengthen the
economy and open up many avenues for the government. ---INFA
(Copyright, India News &
Feature Alliance)
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