A case for Privatising banks

Public sector bank employees recently went on a nation-wide strike to protest against the government’s proposal to privatise some public sector banks. Is the proposal justified? What are the reasons behind such a move? Is it in the interest of the nation and the economy?

March 15th is a very important date in the fiscal calendar of the country, as this is the last date of the financial year for the final instalment of advance income tax. But this year, public sector banks were closed on this day due to strike by the employees of these banks. The strike continued into the next day, i.e. 16th March.

PRIVATISATION WORRY

The employees of the public sector banks were unhappy with this year’s budget proposal to privatise banks, starting with two public sector banks getting denationalised in FY2021-22 itself. To calm down the striking employees of PSBs, the Finance Minister had to intervene to say that all government-owned banks would not be privatised, and that even in the case of privatised banks, the job security of the employees would be kept under consideration. The Finance Minister went further to explain that the government did not have enough money to run these banks, which required recapitalisation.

Banks form the backbone of the country’s economy. To dwell further on the issue of banks, it is desirable to have a brief view of the history of banks in our country. In ancient India, we came across the concept of ‘usury’ with the word ‘kusidin’ in the Vedas, which in translation means ‘usurer’. The Sutras (700 -100 BCE) and Jatakas (600-400 BCE) also mention usury. The Manusmriti considered usury an accepted means of acquiring wealth. Kautilya also mentions the existence of loan deeds. During the Mauryan period (321-185 BCE), financial instruments started becoming popular. The use of loan deeds continued during the Mughal era.

MODERN BANKING

Modern banking in India originated in the 18th century with the establishment of the Bank of Hindustan in 1770, which ultimately got liquidated during 1829-32. The largest and the oldest bank, which is still continuing is the State Bank of India (SBI), which originated with the establishment of the Bank of Calcutta in 1806 (renamed as Bank of Bengal) and with the establishment of the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks got merged in 1921 and the consolidated bank was renamed the Imperial Bank of India and this bank became the State Bank of India after independence in 1955. The bank served as a government-owned bank and later it got six subsidiaries.

Parallel to it, the Reserve Bank of India came into existence in 1935 first through the Reserve Bank of India Act 1934, and then after independence under the 1949 Act. RBI was positioned as the central bank of India, as the bank of banks.

PRIVATE TO PUBLIC

Simultaneous to SBI and RBI, there were many other banks in colonial India that continued in independent India. These were big private banks, but fourteen of them got nationalised in 1969. These include: Allahabad Bank (now merged with Indian Bank), Bank of Baroda, Bank of India, Bank of Maharashtra, Central Bank of India, Canara Bank, Dena Bank (now Bank of Baroda), Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate Bank of India, United Bank of India (now Punjab National Bank).

The second round of nationalisation followed in 1980 when six more private banks got nationalised, including Punjab and Sind Bank, Vijaya Bank (now Bank of Baroda), Oriental Bank of India (now Punjab National Bank), Corporation Bank (now Union Bank of India), Andhra Bank (now Union Bank of India), New Bank of India (now Punjab National Bank). The second set of six banks was not very old, unlike the earlier set of private banks. Another new set of banks, the IndusInd Bank, OTI Bank (renamed Axis Bank), ICICI Bank and HDFC Bank were also founded.

"To calm down the striking employees of PSBs, the Finance Minister had to intervene to say that all government-owned banks would not be privatised, and that even in the case of privatised banks, the job security of the employees would be kept under consideration"

For representational purpose

FLIP FLOP

There have been ups and downs in the status of banks in the past. From 1969 to 1980, there have been legislations to convert private banks into public sector banks while during the 1990s, new private banks emerged. Recently, there has been a merger of weak PSBs with the stronger PSBs. SBI has also been examining the proposal to open more private banks with important corporates taking the lead. And now finally, the government has signalled its intention of denationalisation of PSBs.

The question which very naturally arises is whether private banks are all good and public sector banks all bad? The answer is not that easy, as both have some good and bad points. Today, the employees of PSBs are going on strike as there is more security of jobs in state-owned banks, in addition to many other benefits.

FOR INCLUSIVE DEVELOPMENT

PSBs have opened branches in all corners of the country, without any profit motive. The basic objective is to reach the masses for their benefit. Farm loans or loans to small entrepreneurs may not be very profitable, with the added risk of loans becoming NPAs. Yet the PSBs go for them to bring about inclusive development. These banks have responsibilities to implement government policies in addition to their normal banking work.

On the other hand, PSBs lack good administration and are plagued by the evil of red-tapism while giving loans. Many times loans are given for extraneous reasons without examining the case of the borrower as per the operating banking procedures. This is the reason that as of today, approximately 9% of loans given by PSBs have become NPAs. Quantitatively, NPAs of PSBs amount to about Rs.9 lakh crores. The RBI has warned that NPAs may rise to 12% by September 2021.

Private sector banks are doing much better on the NPA front. Banks like HDFC Bank and Kotak Bank are doing exceedingly well. Frauds and malpractices are more common in PSBs but even private sector banks are not immune to them as we have noticed earlier in Global Trust Bank, now in Yes Bank, and even in the highly reputed ICICI Bank. Private banks are generally blessed with good professional management.

NO MONEY

Is the proposed policy of the government good? The answer is yes. The government does not have the option to retain a large number of public sector banks that are running at a loss. The government cannot and should not sink taxpayer money in such banks.

Banks are business entities and they should be left to the market forces. Profit-making government banks may not be touched. The incident of a big fraud by Nirav Modi where the Punjab National Bank lost as much as Rs.14,000 crores is not an incident in isolation. What Vijay Mallya did to the consortium of PSBs by taking about Rs.9,000 crores and several such examples in the past force us to accept that corrupt practices by a few make us lose big money.

It is better that banks are run by private entrepreneurs and professionals but with strict regulation and supervision. Like any other business, banking should be in the hands of the private sector, but with a more active RBI. Regulators have to ensure that the depositors’ money with the private banks remains well protected.

Some spared profit-making public sector banks will work as team leaders of the banking sector to move forward with the economic policies of inclusive development. ‘Jan Dhan Yojana’ has been a prime example of leadership by the SBI while pushing this programme of the government. The country requires a flourishing banking system and hence, professionally managed private banks are the need of the hour. A few government-owned banks like the SBI should continue to give competition to private banks.

GOOD BANKING

Good banking is produced not by good laws but by good bankers. It is presumed that private sector banks will hire efficient bankers to run their banks efficiently. Efficient banking may mean that lent money goes to deserving people and that such lent money is spent for the economic development of the country. In a lighter vein, Bole Hope had said, “A bank is a place that will lend you money if you can prove that you don’t need money.”

Our banking system which has been prevalent so far has been in consensus with our mixed system of economy. The mixed economy system stands on the two legs of both capitalism and socialism. Normally, there is always a conflict when we stand on such two legs, which are opposite to each other. The time has come to base it more on capitalism. We can create more wealth following this, and once more wealth is created, we can go on distributing it amongst our deprived citizens. Banks are instruments of wealth creation and also for parking that wealth, and hence, we have to begin by making banks privately owned.