In the wake of Punjab National Bank [PNB] mega scam in which it has lost a mammoth Rs 13,000 crore [about US$ 2 billion] and bunch of other public sector banks [PSBs] related scams, commentators have resurrected the idea of privatizing PSBs.
The NDA-government under the then, prime minister Vajpayee [1998-2004] had mooted union government relinquishing majority control [it implies lowering of its share holding to less than 50%] in PSBs initially and eventually to 33%. Recently, a committee set up by the Reserve Bank of India [RBI] under P Nayak also recommended reducing its share to below 50% and housing the residual shares in a holding company.
But, finance minister, Arun Jaitely even while expressing serious concern over proliferating willful defaulters [he concedes that the non-performing assets (NPAs) due to this reason could even be higher than the cases due to genuine reasons such as economic slowdown] has ruled out the possibility of privatizing the PSBs. He has opined that such a decision could be politically tough.
Meanwhile, in a hard hitting statement, citing that corporate governance standards in public sector enterprises [PSEs] are much better than their counterparts in the private sector, Rajnish Kumar, Chairman, State Bank of India [SBI] has opined that ‘privatization cannot be a panacea for the problems afflicting PSBs’.
Given the disorientation of the government [as reflected in Jaitely’s observation] and the political environment, it is most unlikely that we will see privatization happening too soon. However, in the wake of a flurry of scams in recent times and many more expected to tumble out, it is imperative to do some serious introspection to determine whether or not there is any other option left.
A cursory look at the balance sheet of PSBs and those of private sector banks [or even the market capitalization] will reveal that the latter are doing much better than the former in respect of all major financial parameters. But, the moment one takes away the effect of ‘provisioning’ for bad loans/NPAs, the performance would be comparable; in some cases, the PSB may be doing even better.
That this is the case despite their having to meet social obligations like giving loans to farmers and other disadvantaged groups at concessional rate of interest, frequent giveaways of farm loan waivers, setting up of branches in difficult and inaccessible areas such as north-east. But, for these commitments entailing heavy cost, the performance of PSBs would be even better.
Yet, if they are in dire straits, this is attributable solely to the huge NPAs of PSBs [they account for about 88% of total bad loans] which weighs down heavily on their performance. If, these had been due to genuine factors such as the economic slump, this would not have caused much worry as with revival – aided by supportive policy intervention by the government [for instance, imposition of anti-dumping duties on steel import] – the borrowers would be able to improve their cash generation from projects and thus pay back the loan.
But, what does one do when the NPA arises due to the sheer act of the borrower in diverting the loan amount to an avenue other than for which the loan was taken or he simply refuses to pay back despite having the capacity to do so, or indulges in fraudulent activities viz. submitting fake documents to take a loan or acting in collusion with bank staff to swindle money. And, when the finance minister concedes that this must be happening on a large scale, it raises many hackles.
Why did it happen? Why did it continue for so long and remain undetected? Was it a systemic failure? Could it have been prevented? How does privatization become relevant?
Commentators have blamed it on systemic failure and recommended a complete overhaul of the system to prevent willful default many of these bordering on fraud. But, this does not inspire confidence. Already, there are several layers of checks to prevent any wrongdoing. But, these are rendered meaningless when the bank staff colludes in the loot and higher authorities look the other way.
This is the inevitable fallout of a cult built under a regime of ‘crony capitalism’. Under it, businessmen patronized by the ruling establishment manage loans from PSBs and get them ever-greened [taking a new loan to payback the earlier one]. Neither the banks insist on repayment, nor defaulters have any sense of fear of facing penal action in a situation of non-payment.
Such a daring attitude and sense of fearlessness originates from the very fact that these are government owned and controlled banks. And, when those occupying the hot seat who are expected to act against the defaulters/fraudsters chose not to act; instead go a step further in abetting the loot, the results are there for all of us to see.
True, at present, we have a prime minister who has zero tolerance for corruption. That indeed is the reason why the government has put all its investigation/prosecution agencies in the top gear to nab all fraudsters and attach their assets to recover the loan amount to the maximum extent possible. It is also passing new laws/amending existing one to remove all obstacles in the way.
Team Modi is also inculcating a sense of fear among the borrowers and bank management that their wrongdoing will not be taken lightly; that these will be punished severely. Hopefully, with this, PSBs can look forward to refurbishing their balance sheet [of course, with recapitalization support from government] and thereafter continuing improvement in their performance.
But, all this is predicated on Modi continuing at the helm which in democracy cannot be guaranteed. One shudders to fathom the consequences in the event of a change and possible return of ‘crony capitalism’. Hence, an urgent need for a fundamental change whereby PSBs are no longer controlled by the ruling political establishment and answerable only to public shareholders at large.
A decision on whether to relinquish majority ownership and control or privatization in plain words needs to be addressed in this larger perspective.