It’s not the best time to defend public sector banks. Loans given to industrialists (some of them under pressure from powers-that- be) that didn’t come back have cast a shadow on their operations and on their risk assessing capabilities. The unfulfilled promise of a turnaround in their fortunes for the last couple of years have completely eroded their credibility.
The stock markets have therefore lost confidence in their ability to give a decent return to shareholders and have beaten down their shares. And now, like the proverbial last straw, come the scams that some officials of PNB have been involved in. The amounts talked about are no doubt sizeable and seem destined to keep the bank in the red for a long time — barring a miracle.
It is in this context that there have been a series of calls from industry associations and commentators that the Government should get out of banking — by reducing its share and privatising these banks. It would appear that the current mood of shrill and polemical arguments has infected these bodies and experts too, and they have taken leave of calm reasoning and yielded to the cry of the mob.
Forgotten fact
Most of them seem to have forgotten that India is still a poor country. What will happen if private banks run the entire show? More than two-thirds of the country’s population will once again be ‘un-banked’ because these accounts will not be profitable. The Jan Dhan scheme, for instance, which gave access to banking services for millions, was a public sector show all the way — the private sector put in only a token presence. Do we want to go back to an era of exclusion once more?
The answer to the problem of fraud in the system is not to do away with the system itself but to tighten controls and do the basics well. In the PNB case, there has no doubt been a failure at multiple levels. Internal controls have failed. Supervision has failed. Counterparties (30 of them) have failed. Management has been incompetent. Auditors and regulators and their inspections have been lax.
But getting rid of PSBs because frauds happen there is like throwing the baby out with the bathwater. By that bizarre yardstick we must throw away governments because some politicians are frauds or criminals. And that begs the question: What will you replace it with? Is there an alternative?
Private banks may seem better in comparison, but frauds happen there too. They too have bad loans and have hidden them very well. The RBI’s asset quality reviews of private banks as well as the poor results turned in by them have demonstrated that no one is innocent.
And for those who suggest privatisation as a cheaper option for a cash-strapped government, it is perhaps worth asking what will happen if, instead of PNB, it had been one of the private banks that was grappling with a ₹11,300-crore scam? Will the Government or the RBI be able to wash their hands off this on the grounds that it is a private bank and it is the responsibility of their shareholders? Isn’t it true that bail-outs through mergers or other special dispensations will have to be organised, and misgivings about moral hazards have to be set aside? As critics point out, the private sector has successfully ‘privatised’ profits but ‘nationalised’ losses. If it is any consolation, that has been the experience even in the US, the citadel of capitalism. After the 2008 crisis, the US government had to bail out all the blue chip private banks with taxpayer money.
A case of responsibility
So, however appealing the argument for privatisation of PSBs may be, there is no escaping the responsibility that the Government or the RBI has in the event of a bank crisis. They might as well take the criticism they face now on the chin and see how matters can be improved in the banks they control rather than sell them and face the same problem later on. PSBs serve a valuable purpose and the hiccups that occur in their operations must not detract from their usefulness in a poor country. A fraud must not be allowed to create an existential crisis.