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PNB scam exposes rot in public sector banks but privatisation is no solution

Neeraj Thakur | Updated on: 21 February 2018, 0:10 IST
(Arya Sharma)

Every time a government bank reports a fraud in India, it fuels the chorus of those demanding privatisation of the sector. The demand for privatisation of pubic sector banks (PSBs) has been there for close to two decades now-but this time, they say, it's different. PSBs have entered a vicious cycle of non-performing assets or bad loans, which the government is finding difficult to deal with. The latest trigger for such calls is the fraud in the Punjab & National bank that is reported to have led to a loss of more than Rs 11,000 crore to the bank.

The NPAs in the banking sector amount to more than Rs 9 lakh crore today. A large part of this figure is from the PSBs. Given the state of the Indian economy, the banks are in no position to recover their money from borrowers. The recently enacted bankruptcy and insolvency law, hailed by many as the panacea to the NPA problem, is resolving cases by forcing banks to take up to 80% cut on the value of assets under liquidation process.

This is why, from chief economic advisor, Arvind Subramanian, to industry lobby Assocham, thinks privatisation is a one-time cure for the woes of India's banking sector.


Can it work?

If the purpose of privatising PSBs is to diminish the government liability towards banks at the time of their bankruptcy, we need to recall the 2008 global financial crisis that was rooted in the sub-prime assets traded by the private banks in the United States of America. Under the Emergency Economic Stabilization Act of 2008, the United States Secretary of the Treasury spent up to $700 billion to purchase sub-prime assets, especially mortgage-backed securities, to bail out the troubled banks in the financial system. Many experts wanted the private sector banks to fail- as per the free market economy logic- yet the US treasury was of the view that those banks were too big to fail.

So the question in the Indian context is, if PSBs in India are privatised today, will the government never bail them out in future, even if it means destruction of the Indian economy? No sensible economist or banker would ever argue in favour of allowing the banking sector to sink. Therefore, it is difficult to understand why bailing out the likes of Punjab National Bank and Union Bank of India is a big problem.


How would you ensure lending to maginalised sectors?

In 1969, when the then prime minister, Indira Gandhi nationalised 14 banks that controlled 70% of India's deposits, it was done to promote priority sector lending. The private sector banks do not like to extend loans to sectors like agriculture and medium and small scale enterprises. But these sectors provide jobs to majority of Indian workforce.

The ratio of number of people employed by these two sectors remains the same even after 50 years of nationalisation of banks. One of the reasons private sector banks have not been affected as badly by the NPA problem is because they were never exposed to corporate and priority sector loans.

While private sector companies may be asked to raise money through corporate bonds in future, it would not be possible to ask farmers and MSMEs to raise money from private sector banks. These sectors are too risky and cyclical to get financing facility from the private sector banks. The government has specialised institutions like NABARD and SIDBI for these sectors, but the range and capacity of such institutions cannot replace the presence of large public sector banks. It would be difficult to imagine India's growth without the growth of such sectors.

These propositions leave us with no option, at least for the next one decade, but to continue with public sector banks that are better managed under more efficient systems. It would be a difficult task but not impossible.

The government, if serious, should work on giving more autonomy to the managements of PSBs and fixing up responsibilities for the top management. Frauds like the one unearthed in PNB could not have happened with the connivance of just two officers (as being reported in media). In its present form, the investigation into the matter looks more like a ploy to sell off the government banks to the private sector.

First published: 21 February 2018, 0:10 IST
Neeraj Thakur @neerajthakur2

As a financial journalist, his interface with the two dominant 'isms'- Marxism and Capitalism- has made him realise that an ideal economic order of the world would lie somewhere between the two. Associate Editor at Catch, Neeraj writes on everything related to business and the economy. He has been associated with Businessworld, DNA and Business Standard in the past. When not thinking about stories, he is busy playing with his pet dog, watching old Hindi movies or searching through the Vividh Bharti station on his Philips radio transistor.