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 a 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 percent 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 a political dividend in the 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 the 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 the norm for decades.  

During 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 percent of total loans. This situation led a section of the government to 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.

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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

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