Latha Venkatesh
As the fraud at PNB dominates headlines, more and more experts are arguing that keeping so many banks in the public sector is actually a disservice to the nation. Shekhar Gupta in his National Interest column strongly advised the PM to “shut it, sell it & forget it”. Uday Kotak and Vallabh Bhansali hinted at the same as did Prof Raghu Sundaram, the dean of NYU Stern Business School, who said that it is time the discipline of the market was imposed on public sector banks.
The nationalisation of banks in 1969 and then again in 1980 is by far the most pernicious policy decision taken by any Indian PM. It happened by ordinance and without public debate. So, let us step back a bit. During the Nehru era, the government was pro-state, but not anti-markets. When it wanted to encourage steel production in India, it started these plants in the public sector (wrongly, on hindsight) but to be fair, the Nehru regime did not nationalise Tata Steel’s Jamshedpur plants.
Indira Gandhi was different. By nationalising profitable private sector banks in 1969, she sent out a message that any profit making bank is in danger of getting nationalised. She reiterated that message in 1980. The message ended all innovation and initiatives in the financial sector for two decades, precisely when financial innovations scaled great heights globally.
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The stagnation in the financial sector was not lost on the Congress. From 1991, the Congress governments stopped maiming markets. Bank licences were issued to private parties. Even for new steel and power projects, the government relied heavily on the private sector. But it did not reverse the bank nationalisation decision. The Vajpayee and the Modi governments also followed the same policy. So across regimes, the political leadership has been unwilling to give up their control over PSU banks. Here’s why:
Until 1969, the central government had no way of making an impact on issues that genuinely touched the masses. Rural development, health, education were all state subjects. The Centre announced programmes but it had no foot soldiers in the states to implement them. Nationalisation of banks changed all that. Overnight, the heads of SBI, PNB, BOI, BOB and a dozen other banks became employees of the central government.
Since 1969, governments – UPA and NDA – have given banks targets on farm loans, education loans and home loans. More importantly, overnight in 1969, all business houses had to come to government banks for loans. It gave the governments a huge clout over big business decisions.
The NDA government has tried to end some legacy pockets of statism and crony capitalism. Auctioning national resources rather than allocating them was clearly one such step. The desire to privatise Air India is also to some extent an effort to end statism. But whenever the Finance Minister has been asked about privatising PSU banks, his repeated reply has been: “Political opinion is not ready for such a step”.
Clearly, the NDA government also believes that banks need to be in the public sector so that the party can achieve its goals. The Jan Dhan Yojana is a clear example of this policy. Of the 11 crore Jan Dhan accounts opened, only 3.5% were opened by the 13 private sector banks. The demonetisation exercise could have flopped badly in a country with only private banks.
The Finance Minister proudly stated in his budget speech that he has increased the institutional credit to farmers from 8.5 lakh cr in FY15 to 10 lakh crore in FY18 and that he will raise this to 11 lakh crore in FY19. Governments have command over citizens’ taxes. Strictly speaking, they ought not to set targets for deposits that come out of tax paid savings of the citizenry. But like the UPA, the NDA has scant respect for the clear line between the government's tax resources and the post-tax savings deposits in PSU banks. Even while capitalizing the PSU banks, finance ministry officials indicated that fresh capital will be made available to banks upon their performance, and loans to MSMEs was one of the performance indicators. And who is to answer if five years down the line these MSME loans go bad? Clearly the NDA government has been enjoying the clout it enjoys over PSU banks and is unwilling to give it up especially in the last year of its term when it would like to see more jobs created.
But now at long last the PSU banks are becoming a taint to the government's reputation and a drain on their fiscal. So, have we at last arrived at that inflexion point when the gains from owning banks are less than the pain from owning them? The NDA government and party heads have to accept the fact that the state simply doesn't have the bandwidth to run banks. Finance has become too sophisticated and the Indian economy is too market driven to allow a crucial part of the financial sector to be run on archaic socialist principles. And unlike MTNL or Air India, the government cannot let 14 public sector banks to float around like floatsam in the backwaters of the economy.
These banks are still a crucial fuel for the economy and the government. It is vital, indeed unavoidable that the government has to shape up these institutions immediately. The Bank Board Bureau (BBB) experiment has also failed. The government simply must consider turning over at least some of the banks to the market.
The other incidental advantage will be that a mere announcement that the medium term goal of the government is to turn over some banks to the private sector can have a seminal impact on the stock prices of these banks and they will be able to raise the much needed capital at a better price. Thus, even in its battered state, a bank like PNB with over 8,000 branches may appear to be a mouth watering acquisition for some well-endowed private banks.
But the question is: Will the NDA be willing to let go this pot of honey for good?
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