Bank Nationalisation – Time to Bid Adieu to PSU
Banks
Indira
Gandhi nationalized banks in two rounds in 1969 and 1980. Ostensible objectives for nationalization was
to achieve systematic and planned economic development of the country. Other objectives included social welfare,
controlling private monopolies, expansion of banking, reducing regional imbalance,
priority sector lending, developing banking habits etc.
Over the
past few decades, nationalized banks rose to great heights – from about 7000
odd branches to over 57,000 branches, over 8lac employees, over 11,000% jump in
deposits and 9,000% jump in lending (in the 40-50 years since nationalization),
with over 70% market share in deposits/lending.
Over just a
4 year period 2012-13 to 2015-16 the government invested Rs.53,457 crores into
the equity of banks and has plans to infuse an additional Rs.70,000 crores in
the next 3-4 years. Its current equity
value in most banks is largely red in color with massive capital needs to keep
the gasping banks on ventilator. Viral Acharya in a paper in June 2015
estimated the PSU bank capitalization requirement at between Rs.5.12 lac crores
and Rs.9.97 lac crores based on then prevailing NPA loan problem (which has
only ballooned higher in the two years since then to over Rs.10 lac crores) and
certain growth/Basel Capital requirement assumptions. This is clearly a huge
drag on the financial capability of the GOI.
RBI’s Financial
Stability Report of June 2017 highlights the fragility in the PSU Banking space
with its large and increasing non-performing loans issue and falling capital
cover forcing RBI to put many banks under Preventive Corrective Action
basically to stop them from further lending.
In terms of
objectives from nationalization, most are in tatters and many can be met
without the state necessarily owning large chunks of the banking industry.
· Planned all-round economic development
– Nope – Central planning and hubris surrounding it has been quietly buried
· Financial inclusion – Nope. Despite bank network growth, the citizens
most in need for financial inclusion never got access to it
· Social welfare and justice – Nope.
· Controlling private monopolies – Yes
– done by introducing state monopolies with all its attendant ills –
incompetence, inefficiency, crony capitalism, political interference etc.
· Expansion of banking – Branch network
increased by fiat but many branches are unviable and looked upon as punishment
posting. Private banks and MFIs managed
much better reach via BC network
· Reducing regional imbalance – Nope –
East and North continue to trail West and South of India which was true at the
time of nationalization as well
· Priority Sector lending – Can be
achieved without government having to own the sector
· Developing banking habits – Country is
developing banking habits thanks to spread of technology and no thanks to the
PSUs who famously fought to keep computers out to “protect jobs”
· Fraud prevention – Nope. Crony capitalism via banking sector is alive
and kicking leading to massive NPA problem that threatens to destabilize PSU
banks
· Competitive services – Nope. All banks hunkered down to the lowest
acceptable service level
· Financial innovation – Nope. Most banks waited for either an RBI or SBI to
mandate a new product or service.
So what
have we achieved over the years? Over
the years we have managed to use the nationalized banking system to promote
crony capitalism, to promote aggressive bank trade unions (thankfully defanged
in the last decade), promote loan melas and assorted bad behavior to promote
political ends, meaningless expansion into unviable rural areas (which have
hardly made a dent into the lives of locals), perpetuate the formal/informal
economy divide by denying most of the informal economy (over 70% by many
estimates) access to the formal financial system.
As a
counter example, private sector banks, NBFCs, and other private financial
entities continued to come up, offer services, prosper or die as per their merit. These entities showed that there is nothing
exclusive to what the government does in the Public sector banking system that
cannot be provided as well or as badly as the PSUs by private entities. Also their success or failure have not led to
any massive destabilization of the system.
For an
economy growing in nominal terms at around 10% there is a continuing need for
financial support which the dominant public sector has woefully failed to
provide. Bank licenses sparingly and reluctantly
handed out by RBI have been gleefully lapped up by the private sector
entrepreneurs, private capital of all types (IFC, sovereign funds, Private
equity, VCs, public and private investors) and are stock market darlings across
the range of financial services – mono-line NBFCs, private sector banks, MFIs,
new age lenders etc. Financial services
stock have been the toast of capital markets except if there is a Govt of India
ownership/management tag attached to it.
The
problems are well known and well documented.
Umpteen committees have sat and prescribed common sense solutions to the
current woes. Political compulsions have
led the powers-that-be to brush it under the carpet, drip feed capital to the
sickest of banks, urge mergers and other non-solutions to wish that a broader
tide in the economy will lift all boats.
If the capital infused in public sector banks over the last few years
(amounting to over Rs.50,000 crores) was spent on acquiring minority say 5/10%
stake in banks like HDFC Bank, Yes Bank, Kotak Mahindra Bank or RBL by the
government, it would have been in much better situation to meet some of its burgeoning
financial needs to serve social purposes rather than see it vanish in another
round of NPA recognition.
In this
context, it is refreshing to hear former RBI Governor YV Reddy suggest that
trying to fix-and-sell banks may be a sub-optimal solution; it may be better to
sell and let the buyers fix the mess. It
is for the first time that someone of such standing has called out the
obvious. In this day where the privatization/sale
of Air India is being boldly championed, it is indeed refreshing that a call
for debate on selling off the public sector banks on an as-is-where-is basis is
being made by such an illustrious person.
19 July
1969 was the first round of nationalization.
With its 48th anniversary falling in a few days time, now is
as good a time as any to look at the whole bank nationalization program and
declare it a failure and consequently a time to cut losses and move on. If we wish to sugar coat our words, lets
agree that Nationalisation has served its purposes and we can now exit from it
and let government come out of the industry except to regulate the service
providers. Lets learn what history
taught us in terms of human behavior and the inability of lofty idealism to rein
in base human instincts. Government
ownership in most spheres (barring a rare ISRO or two) has been exploited by
politicians, managers, workers and customers to their own needs and away from their
stated objectives.
Except for
a handful of banks like SBI and a few of the better managed banks, the rest
should forthright be put on sale given the large private demand for bank
licenses. Fear of selling at the bottom
should not be an excuse for delaying action and adding to our cost of bailing
them. Government can retain minority stake
to ride possible growth and anyway Government is a partner via taxation of all
businesses and their successes. The
current philosophy of privatization-by-stealth of the banking industry can be
replaced with overt privatization at a lower cost to the exchequer. The more we pussy-foot around the matter, the
more disservice we do to the socially weak and to the future generations.
10 July 2017
