What is the issue?
The multiple frauds that have been unearthed recently have reopened the debate on privatising Public Sector Banks (PSBs).
What have been the contributions of the PSBs?
- Since nationalisation of major banks in 1970s, the contributions of PSBs have been widely acknowledged.
- PSBs led the drive towards opening more bank branches, particularly in hitherto unbanked and rural areas.
- PSBs expanded agricultural credit, short term agricultural credit (‘crop loans’), both of which in 2017-18 is projected to total Rs 622,685 crores.
- Notably, PSBs pioneered the concept of ‘priority sector lending’, which opened up many sectors deprived of banking credit to access loans.
- Differential Rate of Interest (DRI) loans to the very poor was also the brainchild of public sector banking.
- PSBs extended loans to women’s self-help groups that totalled to Rs. 61,600 crores per annum, which is significant for women empowerment.
- Liberal education loans are another category of importance, for which as much as Rs. 70,400 crores have been issued by PSBs annually.
- PSBs funded rural infrastructure through the Rural Infrastructure Development Fund and pioneered financial inclusion.
How has the banking policy evolved over the years?
- From a sole PSB (State Bank of India) in the 1950s to bank nationalisation in the 1970s to open competition in the post liberalisation era, Indian banking has come a full cycle.
- Notably, diluting the government’s holding to not less than 55% to completely privatising PSBs (UTI Bank was converted to Axis Bank), have also been done.
- In comparison to private banks, PSBs fall short on many financial ratios, market capitalisation, and management competence.
- Yet, there is a widely held view, especially among the middle classes and the poor that PSBs must be nurtured, a notion that indeed holds logic.
Will privatisation help in addressing the banking crisis?
- The scandal involving the Punjab National Bank (PNB) has revived the demand for privatisation as part of comprehensive banking sector reforms.
- As a general proposition, a scam has nothing to do with ownership and much larger bank scams have occurred in private banks in many countries.
- In the last ten years alone, private banks such as Lehman Brothers, Royal Bank of Scotland and Merrill Lynch have collapsed due to scandals.
- PSBs in India have multiple layers of supervision like - Board of Directors, RBI (regulator-cum-Supervisor), and department of financial services.
- Also, the recently created “Bank Board Bureau” has also joined the fray.
- Also, a PSB branch is “subject to seven audits namely - internal, concurrent, snap, recovery, statutory, external and stock audit.
What has the current government done?
- Soon after assuming office, the NDA government separated the offices of Chairperson and MD of a PSB.
- Arbitrary and whimsical transfers among the chairpersons, new rules were made and two outsiders were also appointed as MDs of important PSBs.
- These were subsequently changed in a short time and the old practice of promoting Executive Directors as Managing Directors was restored.
- In 2015, amidst great fanfare, the government announced the “Indradhanush” plan to reform PSBs.
- Notably, post of the chief of the “Department of Banking Supervision” has been lying vacant for almost six months now.
How does the future look?
- The government fussed over recapitalisation of banks and declared that it would give funds only to those banks that undertook reforms.
- But Punjab National Bank was given Rs 4,714 crores since 2014-15 and was promised Rs 5,473 crores more, which seems inexplicable.
- The massive fraud in PNB and perhaps in other banks too, indicates that little has changed in the systems of PSBs.
- Other banking schemes like - EASE (Enhanced Access and Service Excellence) and ‘Seven-pronged Approach’, were nothing more than mere acronyms.
- A reform is a plan that is conceived, well-designed and implemented with a clear focus on the intended outcomes.
- While 4 years of the current government’s tenure has lapsed with little progress, announcing big ticket reforms now won’t be impactful.
Source: Indian Express
