Economic Highlights
New Delhi, 22 August
2022
More Pvt Banks Fail
PSBs BETTER ON THIN
SPREAD
By Shivaji Sarkar
Public sector banks
(PSB) are critically needed today as these were in 1969, is virtually the
message that the Reserve Bank of India has given. Its observation that
privatisation can do more harm is almost a warning.
Independent reports
suggest severe weakness in seven private banks - Federal Bank, Yes Bank,
Karur Vysya Bank, Lakshmi Vilas Bank, Karnataka Bank, Dhanlaxmi Bank and South
Indian Bank. The second largest bank ICICI has gone through many hiccups and
its top officials put under probe. The HDFC is penalised for unethical
practices. From 1969 onwards, a 2018 report says, 36 private banks,
including 10 during last 20 years, have been put under moratorium, due to
mismanagement.
The RBI report is
almost an echo of the views expressed by Pranab Mukherjee as then Finance
Minister in 2008 after the collapse of Lehman Brothers. He triumphantly said
the country was able to weather the global financial crisis on the back of its
strong banks. History proved that later the same government encouraged undue
incentivisations of the corporate post 2009. It led to an avoidable critical
non-performing assets (NPA) situation. The RBI is right that the banks are not
at fault but extra-banking decisions have led to many crisis-like situations
and unwanted write offs.
The national psyche
has yet to accept the move to privatise the banks. The bank employees went on
strike a number of times during the past one year. The recent dilution of
Life Insurance Corporation (LIC) equities have only resulted in its share
prices losing shine. The RBI paper is almost a counter to the policy paper of National Council of Applied Economic
Research (NCAER) Director General Poonam Gupta and former NITI Ayog
Vice-Chairman Arvind Panagarya which recommended privatisation of all banks
except the State Bank of India.
Decisions of the
Narendra Modi government such as MUDRA, Skill India, Jandhan Yojana,
transferring of PM Kisan and other direct benefits were deftly handled because
the banks are in social control. Demonetisation would not have been possible
had not the public sector banks efficiently managed it.
The Indian financial
sector underwent a tectonic shift, when the Indira Gandhi government
nationalised the 14 biggest commercial lenders on July 19, 1969. The second
volume of the official history of the RBI describes bank nationalisation as the
single-most important economic policy decision taken by any government after
1947. Central bank historians say that in terms of the impact, even the
economic reforms of 1991 pale in comparison. It may be recalled prior to the
takeover, often one or the larger banks were rumoured to be facing moratorium.
The RBI bulletin
critically observes that public sector banks have given yeoman service to the
stabilisation and growth of the different sectors. They have higher degree of
market confidence, better financial inclusion objectives, labour cost
efficiency and handled Covid-19 shock well.
The bank employees,
including the unions linked to the Bharatiya Mazdoor Sangh have been
protesting, occasional strikes included, against the move to privatise. In
1980, again 20 banks were bringing 90 per cent of the banking under the public
sector. The banks were, economists observed, fiefdoms of big business. It got
under social control. The common man, the poorest, students and the needy
entrepreneurs got access to finance, which the private house controlled banks
had denied. It paid Congress political dividend in 1971 elections. People in
general welcomed it but gradually aberrations set in as politicians could
control the banking decisions.
The first major
loan-waiver by Janata Party government led by the then Prime Minister VP Singh
cost the exchequer Rs 10000 crore yielding to the demands of agitating farmers
in 1990. The second one of Rs 60000 crore was by the UPA government in 2008.
Thirteen States followed it in the subsequent years to give relief to farmers.
This was criticised but there was wide support too as the write-off of big
loans of the industry too became norm for decades.
During the 2004-2014,
the UPA government wrote off loans worth Rs 2.20 lakh crore. In subsequent
years another Rs 19.2 lakh crore of large loans were written off. Banks say
these are totally unrecoverable and excluded from balance sheets.
Yes these have been
problems. The PSBs suffered a grievous injury when they ended up with a
huge amount of gross NPAs or bad loans, which peaked at Rs 8.96 trillion
in March 2018, 14.6 per cent of total loans. This situation led a section in
the government mull over privatising the banks, starting with four major banks
the Central Bank of India, Bank of India, Bank of Maharashtra and Indian
Overseas Bank despite the latest recapitalisation of Rs 15000 crore.
The premise that
private sector banks are doing better is being disputed by the RBI paper.
It highlights that the private banks have failed to cater to the customers
of the rural and semi-urban areas to date and customers from such locations are
relying heavily on PSBs for banking. It turns out that even after bank
nationalisation and with more stringent regulation of the banking system by the
RBI, private banks continue to fail.
Some of the major
reasons as identified by the RBI paper shows PSBs can serve the country better
than private banks as these have better financial inclusion, superior credit
system, and better efficiency.
The paper hints at a
possible convolution of financial engagement if the entire sector is
privatised, as the NITI Ayog suggests. It says that private banks are oriented
to profits while the public banks work on thin spread but serves a larger
section and different strata of the society. It implies that if the sector is
privatised many government programmes as well as social welfare aims might get
hit resulting in social imbalance. It notes that despite weak balance sheet,
resource utilisation of the public sector had been more efficient and that gave
them the edge in weathering the covid pandemonium shock remarkably well.
Once privatised, the
large social wealth would be beyond the reach of the people and the government.
This was the problem that the government faced most during the 1960s. If these
are sold out again to similar people, many of whom are large defaulters, the
countercyclical role of the banks would suffer the most. This apart it might
cause severe fluctuations in lending rates affecting most government programmes
and severe social imbalance.
It may not be good for
the PSB themselves as abstract factors can affect their share price, market
sentiment, valuation and may have three risks – interest rate, regulatory,
price-to-earnings ratio and price-to-book value. For better social returns the
public sector is the ideal and privatisation is not the panacea. ---INFA
(Copyright, India News
& Feature Alliance)
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