Considering Privatisation of Public Banks

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