Privatization will not solve the problem, it’s just an escape. Fixing the governance issue is the ultimate remedy.
Shekhar subham
As soon as the Finance Minister mentioned in her budget speech that two banks along with IDBI and a general insurance company will be privatised this fiscal,this set off a debate around privatisation of Banks.Banks’ privatisation has been a politically sensitive topic given its socio-economic aspect.This was the reason the previous UPA govt refrained from taking a firm stand on privatisation.
But current regime, emboldened by its numerical strength, both in lower house as well as upper house, is aggressively pushing for banks’ privatization. One can’t deny the fact that PSBs’ governance need an overhaul given the burgeoning condition of NPAs and the health of our financial system, but is privatization the only respite?
If we listen to the government’s contention,continuous injection of capital has not produced desired result.This fiscal ₹20,000 crore has been set aside for recapitalisation. ₹80,000 crore,₹1.06 lakh crore and ₹65,443 crore was provided for recapitalisation of banks in FY 17-18,18-19,19-20, respectively. In 2020-21, government infused 5500 crore as fresh capital in PSBs through non-interest bearing special securities.
According to Financial Stability Report of RBI, released in January, GNPA of PSBs improved to 7.5% from 8.4%. However, here is a note of caution, decrease is NPA in balance sheets of bank is more due to write-offs of bad loans and not due to recovery of bad loans. Macro stress test incorporating the first advance estimates of GDP, for 2020-21,released on Jan 7,2021,indicates that GNPA ratio of all SCBs may increase from 7.5% in September to 13.5% by September 2021,under baseline scenario; the ratio may escalate to 14.8% under a severe stress scenario, underlines the report by RBI.A report by India Ratings, published in July 2020,stressed that top 5 private banks which includes-HDFC Bank, ICICI Bank, AXIS Bank, Kotak Mahindra Bank and Indusland Bank, stare at 5% NPAs in FY 21.These banks cover three-fourth of the private banking space
“We forecast FY21 slippages to nearly 5% for these banks from 2.3% in FY19 and 2.7% in FY20,even though net slippages would be lower if refinancing remains a challenge, resulting in a 4% contraction, in their net interest margin”, added the report. RBI report in Dec-Jan predicted NPAs for private sector between 4.6% to 7.5% in coming fiscal. So the government’s
argument that it will save taxpayer’s money holds some merit. Moreover private sector has kept their NPAs well below their Public counterparts.
It is argued that private banks have a better governance and they are much more efficient, which in fact is a true up to some extent. In private banks, generally the persons at the helm of affairs are those who founded the bank so they have personal incentive to operate efficiently. On the other hand PSBs are managed by government appointed bureaucrats who work under government’s interference. Also, since their job tenure is not fixed, they are often at the receiving end when they do not lend to a businessman favored by government.
However, the picture for private banks is not so bonny. Last year we saw that governance issue surfaced in Yes Bank wherein the bank’s owner Rana Kapoor gave money to people mindlessly, risking general public money. Moreover we witnessed in 2019,how ICICI, then headed by Chanda Kochhar, favoured a loan worth 1730 crore to Videocon Group which ultimately turned bad.
Post demonetization Axis Bank employees were caught in money laundering case. However these instances are not exclusive to private sector. In fact it is public sector which has a well established reputation of indulging in corruption. The famous Harshad Mehta Scam which was to the tune of ₹4024 crore at that time as was detonated by Janaki Raman Committee, could not have happened without the complicity of SBI employees. Nirav Modi Scam could not have happened without the complicity of PNB employees. And these are those cases which have come in public places. Experts of the financial market argue that scams worth much more than these have not come in public domain.
Privatising banks has a lot of consequences. In 1970s banks were nationalised as the banks were not catering to the people in rural areas.It is well understood that opening branches involve certain expenses and if banks are unable to collect sufficient deposits,it will be difficult to run the bank.And in rural areas,cost of operations of banks would be higher,so it is doubtful that private banks will open their branches in rural areas. So Financial Inclusion especially in rural areas,will surely take a back seat when banks are privatised.The reservation policy meant for upliftment of historically oppressed and marginalised community, might be left neglected.Private sector banks are not sufficiently aware of their social responsibilities and are more concerned for their profits.
So the bottom line is that both private banks as well as Public banks suffer from governance issues.So the argument that once banks are privatised and the governance issue and other issues like NPAs will be fixed is a flawed in itself.
What is the way out?
Governance issues need to be fixed, appointment procedures of heads of PSBs should be made transparent. Also they need to be given a competitive salary. The chairperson of SBI earns one-fifth of what the CEO of a private bank which is one-tenth of the size of the SBI,earns. Interestingly at lower positions,PSBs offers higher salaries to their employees than that of their private peers.Paying competitive salary would also help in checking corruption issue,this would help in retaining best mind in PSBs.The retirement age of the Bosses of the PSBs should be increased to 70 from the current 60 to bring it on par with the private sector norms.This would help in maintaining stability which in turn can help in bringing long term reforms.
PSBs are a very attractive career option especially for college graduates as it offers job guarantee besides other perks and benefits. Every year lakhs of candidates apply to get recruited in banks. This ensures that PSBs get best manpower. What PSBs need is to further train and upskill these manpower. In addition, the NPAs need to be recovered for this creation of a bad bank and Asset Reconstruction Company seems to be a decisive steps. However, along with the benefits it also has some downsides. On one hand it will free the bank from recovery headache, on the other hand it will affect the bank’s due diligence while lending loans as banks would have an organization to help them recover bad loans. Experts argue that instead of bringing one more regulation, existing regulations like IBC could have been strengthened. Privatization will not solve the problem, it’s just an escape. Fixing the governance issue is the ultimate remedy.
Writer is a student of Faculty of Commerce, BHU and Member of FETC