Post Mortem

Tale of PSBs’ woe continues

By Nagaland Post | Publish Date: 4/4/2021 1:00:15 PM IST

 It was in the year of 1969, when 14 largest private banks were nationalizedto promote rapid growth in agriculture, small industries and export thereby encouraging new entrepreneurs and developing backwards areas.Imperial Bank was nationalized and renamed as SBI in 1955; big industrialists ownedprivate banks were not willing to provide credit in agriculture. The share of agriculture in credit was just 2% in1951 in compare with 34% for industry (64% in 1967). The war with China (1962) and Pakistan (1965) followed by two droughts made things worse leading to negative GDP growth rates and double digit inflation.Foreign exchange declined and rupee devaluated from 4.76 to 7.5 per $ in 1966. Then government was criticized for selling out to Americans. 

But bank nationalization was a radical economic reform.It pushed 85% of banking assets under the control of the state. Rs 50 crore in deposits was set as the threshold level for nationalization.Banking Laws (amendment) Act, 1968 gave guidelines to help agriculture and Small Scale Industry. As devaluation helped to improve the Balance of Payment, the Green Revolution began to ease the food constraints. Another nationalization of six more banks followed in 1980. The one positive impact of nationalization was the financial savings roseup to 91% as lenders opened new branches in unbanked areas helping Financial Inclusion.The economic boom driven by private sectors was overwhelmingly funded by PSBs (Public Sector Banking). 

Nationalization no doubt gave government more control of credit delivery but political influencetoPSBs continued. Bad loans mess weighed down Indian economyas defaulters are exposed in stress sectors. Rising energy prices and failed monsoons played stagnation for growth. SBI completed mergers of five associate banks along with BMB in 2017.In 2019, the government decided to bring down the number of PSBs to 12 from 27 by announcing merger of 10 PBSs. Now IOB, CBI and UCO of the 12 PSBs are under RBI’s Prompt Corrective Action framework due to poor asset quality and loss of profitability.

In Union Budget 2021, the finance minister took an ambitious plan to privatize 12 PSUs to meet Rs 1.75 lakh crore Disinvestment Targets. The government would like to have at least one company for each strategic sector and sell off everything else. Stakeholder, trade unions and banking industry have opposed the government for denying PSBs social responsibility. Distressed by the government decision for pursing adverse banking reform policy, PSBs under the umbrella body of Union Forum of Bank Unions (UFBU) have called for a two-day strike on March 15 and 16 as a mark of protest against privatization.Instead of reforms of PSBs management, the governmentplan to raise funds by reducing fiscal burden and avoidingrecapitalize PSBs.

The NITI Aayog suggested that Punjab & Sind Bank, UCO and the Bank of Maharashtra be sold off. RBI advises government to reduce share in PSBs to 26%. Others recommended that healthyPSBs should also be privatized. The arguments are that the private sectors are more efficient and they will cut the flab and make more profitable. Government needs money by selling shares to raise funds. Finally, there are issues of NPAs as PSBs are saddled with highest grossbad loans. Are these hard reforms needed to attract investors?

It is ironical that said campaign is coming at a time when India’s private banks have shown serious signs of mismanagement. ICICI had to sack its MD after allegations of nepotism. HDFC is under a cloud over conflict-of-interest allegations in auto-loan. Yes Bank had to be saved by SBI.RBI asked DBIL to take over the operation of Lakshmi Vilas Bank. Do bank bailouts really use taxpayers’ money? So much for that private sector efficiency! Government is responsible for the current state of PSBs for fulfilling welfare function forcefully. 

Banks collect public savings andlend capitalfor investment. But privatization promoters feel that the market is the most efficient allocator of capital. PSBsshares of social responsibilityare larger than quarterly P&LStatement. But banks have to meet Liquidity Coverage Ratio as well as RBI’s SLR and CRR. PSBs are not ready for BASEL III norms as they fall short of capital requirements and our gross NPA rise to 10% now. PSBs earn good operating profits and instead of strengthening them the government is not ready to infuse required capital, human resources and now proceeding disinvestment and privatization.

Privatizing PSBs are unjustified and regressive idea. There are speculations that agriculture sector might not get access to credit. PSBs helped in building the nation, looking after by supporting infrastructure development, industry advancement and social security, the financial empowerment and agricultural growth.When the global financial crisis (2008) hit, depositors shifted their money to SBI as they felt government to come for rescue. Government claims Jan DhanYojana was a big success and it is possible because of PSBs initiative for 80% Indian accessing banking facilities. Taking recovery from corporate assets would be beneficial.Government must make statutory framework to recover NPAs.Are there anyother economic reasons to privatize PSBs now?

Kamal Baruah

A former air warrior and now working for SBI

 

Launched on December 3,1990. Nagaland Post is the first and highest circulated newspaper of Nagaland state. Nagaland Post is also the first newspaper in Nagaland to be published in multi-colour.

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