Banking Central | Who will save India’s public sector banks from politicians?

At the last count, loans worth Rs 42 lakh have been released by Tamil Nadu (TN) Bhartiya Janta Party (BJP) unit under various government loan schemes.

According to the website of state party unit (www.tnbjp.in), it has received 23,524 loan applications and has processed 57 of them amounting to the above mentioned loan figure. The party unit’s action, and the message it has sent to other states, is damaging.

A political party has no business to get involved in the banking business that is regulated by the Reserve Bank of India (RBI). Public Sector Banks, PSBs, are not tools to win votes.

The TN BJP unit’s apparent argument that it is only helping out people to get loans doesn’t hold water. The counter question is this: if people want loans, they can anyway approach a bank and get it done; what's the need for a middleman?

There is no dearth of bank branches in TN unlike the North Eastern states. When a political outfit, that too a ruling party, approaches a bank soliciting a loan, logically the bank employee/ local branch manager comes under pressure to oblige the “request”.

One senior banking industry official told me this “request” often takes the form of veiled threats and the credit officer is left with no choice to sign the sanction letter. Such interference used to happen rampantly in Mudra loans.

Banks are supposed adjudge the veracity and the creditworthiness of a borrower through a rigorous process. Although this doesn’t necessarily happen on many occasions, the involvement of a politician makes things even worse.

PTSS syndrome and a PSB employees     

What reminds me is the post traumatic slave syndrome (PTSS). PTSS is a much debated mental traumatic disorder in the west. Loosely defined, this refers to a condition that exists when people, in many generations, experience trauma resulting from centuries of slavery and continues to suffer the trauma even today in a world where slavery no longer exists.

In some ways, India’s public sector banks, suffer from PTSS. Long years of nationalisation has taken the operational autonomy away from these banks and has instilled a deep sense of public sector culture.

Many would agree that they operate in a feudal set up, even today. There are bank chairmen in PSBs who act like feudal lords and the hierarchy below him follow the same approach to their junior officers.

How to please the boss (the government) is the dominant norm rather than focusing on quality and professionalism. Business decisions are often dictated by the government — the majority owner in these banks and the ultimate boss. Every babu in the North Block has a commanding power over the PSBs.

Informal missives and phone calls giving directives aren’t uncommon. The UPA was blamed for micromanaging PSBs and the situation hasn't changed much even in the NDA era.

MSME loan scheme

The latest instance of government muzzling PSBs against their will is the way the Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) is being pushed through government banks. The scheme, announced by Union Finance Minister, Nirmala Sitharaman as part of the Rs 20 lakh crore COVID-19 package, has come as a big burden for PSBs.

In a poor demand scenario, it becomes tough to convince MSMEs to draw more loans and push them to the verge of over-indebtedness. Ever since the launch of the scheme, branch level employees have been under tremendous pressure to show maximum amount of sanctions. I’m told that to show bigger numbers, some branches have been even asked to pre-sanction the loans to all eligible borrowers and push for disbursement.

A few banks, on the other hand, find this is as an easier way to settle old dues. The charm and lure of government guarantee is compelling.

But ultimately, is this money going to be used for the intended purpose or whether it suffices to handhold MSMEs to survive the crisis is a bigger question.

Ultimately, an existing borrower can draw only up to 20 percent of the outstanding credit as on February 29. As on July 23, banks have sanctioned Rs 1.3 lakh crore loans under the scheme and disbursed Rs 82,065 crore.

The point here is this:

The government must stop using PSBs as an extended division of the finance ministry and treat bank employees with dignity.

It wasn't long ago when the chairman of a very large government bank was scolded publicly by a union minister and the leaked video of this incident went viral.

Unless banks are given the freedom to decide and implement business decisions, banking sector NPA (non-performing assets) problems can’t be addressed.

In a highly competitive industry, PSBs need to be given a level playing field. This is something former RBI governor Urjit Patel has said in his latest book, Overdraft: Saving the Indian Saver. Government must pay heed and leave banking to banks to do.

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.