The academic paper ‘Privatisation of Public Sector Banks in India: Why, How and How Far’, authored by Poonam Gupta, Director General of the National Council of Applied Economic Research and Aravind Panagariya of Columbia University, both respected economists, is a welcome addition to the debate on the performance and roles of the private and public sector banks (PSBs) in India’s economic growth.
It has contemporary relevance as the government has already initiated reforms in PSBs through mergers, bringing down their number from 27 to 12 in just three years. The government has, however, stated that banking will be treated as a “strategic” sector as part of its disinvestment policy.
The paper highlights issues affecting PSBs which are already known. The RBI, a regulator which has acquitted itself remarkably well over several years, and the government have appointed various committees to suggest solutions — the latest comprehensive report is the one headed by PJ Nayak.
Where the paper errs is in its one-shot solution: privatise all PSBs but hold on to SBI, for the present. It is a simplistic laissez-faire response to what is, at worst, a dirigisme issue.
The paper believes in the panacea of privatisation and reaches a conclusion “a priori”. The intention is clear in the “Introduction” itself, where it is stated: “Hence it is essential to focus on making the case for the privatisation of PSBs and outlining the possible paths to it. This, therefore, is the task we set for ourselves in the paper.”
What is surprising is that its overall thrust is antithetical to the Prime Minister’s ideological praxis for the nation’s way forward — inclusion and growth are equally important. While one of the authors is a part-time member of the PM’s Economic Advisory Council, the other is a former Vice-Chairman of NITI Aayog and a supporter of the “Gujarat Model”.
The paper also indisputably fails the test by the touchstone of Gandhiji’s talisman: “Recall the face of the poorest and the weakest man [woman] whom you may have seen, and ask yourself, if the step you contemplate is going to be of any use to him.”
The most problematic aspect of this paper is that it totally ignores the positive impact of “financial inclusion” and poverty alleviation through government-sponsored loan schemes for which the heavy-lifting has been done by the PSBs and where the private banks do not want “market share”.
About 90 per cent of the 45 crore PM Jan Dhan Yojana accounts have been opened by PSBs. The private sector knows which side of the bread is buttered. But the government’s successful DBT (without leakages) for the PM-Kisan scheme, the Covid cash transfer to 20 crore women beneficiaries and all other seamless cash benefit transfers would not have been possible but for PMJDY.
The same holds good for loans under the Deendayal Antyodaya Yojana. About six crore women have been given livelihood loans under the scheme, 90 per cent of them by PSBs and RRBs, sponsored by PSBs. Even the latest PM Svanidhi (street vendor loans under the Atmanirbhar package) has been powered by PSBs.
Though all these are commercially viable lending schemes, social banking is a concept which the “market” does not like. By definition, social banking is anti-“valuation”. But the “stock market” cannot be the barometer to judge the role and relevance of these schemes for a developing nation.
This is not to argue against the overreaches of government ownership which have affected PSBs’ performance. Not all of PSBs’ higher level of NPAs are a result of their ownership. Core sector and infrastructure loans were stepped up at breakneck speed in the decade from 2004 to 2014. The PSBs had a major share of these loans. This resulted in infra build-up and core sector capacity addition.
Cocktail of bad loans
In some cases promoter malfeasance, loose due diligence and monitoring by PSBs and promoters’ malfeasance created a cocktail of bad loans, most of them big-ticket. Tighter regulatory norms (restructuring resulting in downgrading of an asset) and enablers like Insolvency and Bankruptcy Code (IBC) have altered the landscape.
Even granting that government-control is a handicap, de-nationalisation is not the answer to problems engendered by it. As the paper itself acknowledges, SBI — a proxy for the Indian economy — has stood its ground. Quite strangely, the paper, while discussing NPAs, says: “This mostly reflects better management at SBI than other PSBs but also closer scrutiny of it by the government given its large size”. If government ownership is a bane, how does it fit in with the above statement?
The NCAER paper further compounds its suggested remedy by proposing that Indian Bank and Bank of Baroda, two of the top performing PSBs should be privatised first. The “privatisation of profit and the nationalisation of losses” charge against classical free-market theorising would definitely be in order here.
It is also noteworthy that the authors hedge their views on the rescue of YES Bank by a group of banks led by SBI. If privatisation is the answer to the problems faced by PSBs, then no private sector bank should be rescued with taxpayers’ money. The GTB fiasco and the merger with PNB is not a faded memory.
Aside from the above, the paper makes some factual errors, such as referring to SLR at 23 per cent (18 per cent since April 2020). It goes to the extent of even stating that the RBI exercises dual regulation: one set for private banks and another for PSBs, which is not correct.
Governance issues in banking cannot be addressed by privatisation. Banking and money is all about trust. When it comes to the crunch, the ultimate trustee will anyway have to be the government. The rescue of Royal Bank of Scotland by the UK Government is a major example of how even in free-market economies, public money has been used to prop up failing banks.
A professional arm’s length relationship between government and PSBs, which underpinned the PJ Nayak Committee recommendations of a holding company structure, is a viable alternative. The fact that it has not been implemented is no reason to dump it. While profit and “valuation” are not definitely dirty words, they cannot be the only watchwords.
The writer is a top public sector bank executive. Views are personal