Economy

KEY POINTS

·         Loans given to industrialists that didn’t come back have cast a shadow on PSB’s operations and on their risk assessing capabilities.

·         The stock markets have therefore lost confidence in their ability to give a decent return to shareholders and have beaten down their shares.

·         And now, the scams that some officials of PNB have been involved in came to the limelight. 

·         It is in this context that there have been a series of calls from industry associations and commentators that the Government should get out of banking by reducing its share and privatising these banks.

Arguments for privatisation

·         Residual claimant – Private businesses, which have a residual claimant who either profits or bears the losses. But, there is no residual claimant in PSB’s.

·         Less importance to performance – Employees of PSBs are rarely promoted based on performance, or fired for non-performance.

·         In a world, where future prospects are based on seniority and age instead of merit, there is little incentive to make good decisions.

·         In a privately run bank, mispricing loans would lead to losing one’s job, and taking sensible and calculated risks would lead to praise, bonuses and promotions.

·         Indifference to technology – Private Banks in India have updated to core integrated banking systems that can detect transactional discrepancies.

·         They have several checks and balances, especially for large transactions that are signed off by a few employees in sensitive positions.

·         Lack of accountability – Private Banks have an incentive to be careful while lending their money since they are directly accountable to depositors, owners and shareholders.

·         PSBs, on the other hand, are spending taxpayers’ money—a limitless resource to cover all mistakes.

·         Political interference – Hard and soft political pressure is applied to instruct bank management to accommodate well-connected businessmen.

·         Private Banks are much too careful to lend to such poor and risky businesses.

·         But even PSBs with honest employees may have no choice but to follow the orders issued at the top.

Arguments against privatisation

·         India is still a poor country. In this context, if PSB’s have been privatized, more than two-thirds of the country’s population will once again be ‘un-banked’.

·         Because, these accounts will not be profitable.

·         The Jan Dhan scheme, for instance, which gave access to banking services for millions, was a public sector show all the way — the private sector put in only a token presence.

·         Private Banks may seem better in comparison, but frauds happen there too. They too have bad loans and have hidden them very well.

·         The RBI’s asset quality reviews of private banks as well as the poor results turned in by them have demonstrated that no one is so strong.

·         Even though, it has been suggested that privatisation will be a cheaper option for a cash-strapped government, if instead of PSB’s, it had been one of the private banks, will the Government or the RBI be able to wash their hands off this on the grounds that it is a private bank?

·         For example, after the 2008 crisis, the US government had to bail out all the blue chip private banks with taxpayer money.

·         The emergence of private sector banks would successfully privatise profits and would nationalise losses.

Way Ahead

·         So, however appealing the argument for privatisation of PSBs may be, there is no escaping the responsibility that the Government or the RBI has in the event of a bank crisis.

·         PSBs serve a valuable purpose and the hiccups that occur in their operations must not detract from their usefulness in a poor country.

·         The answer to the problem of fraud in the system is not to do away with the system itself but to tighten controls and do the basics well.