Privatisation of Banks –
Reversing the History
Good economy and bad banking can never go together. But will privatisation usher in good banking? Why at all the banks that were once private, were nationalised in 1969 and later liberalised in 1991? These are some questions that occur to any customer of a bank when he sees that the union government would like to privatise the nationalised banks by amending the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 in the monsoon session of the Parliament.
1970 Banking Act required the
union government to hold at least 51 percent of equity. When Mrs Indira Gandhi
overnight nationalised the banks in two bouts – first in 1969, fourteen and
second in 1980, six banks with different capital thresholds, it was just not a
political move. Banking as a public good, was not within the reach of millions,
more particularly, the neediest, in the rural areas then.
When the first stage of
reforms started in 1991, nationalised banks were found to have achieved the
expectations, ushering in barefoot banking and phenomenally improving the reach
through the Lead Bank Scheme and Service Area approach, al bait at the cost of efficiency. The reforms
helped cleaning up the banks’ balance sheets, introduced asset-liability
management, prudential management, and better and responsible customer service.
Within fourteen years, they became symbols of inefficiency reflected in large
accumulation of non-performing assets (NPAs).
Inclusive banking approach,
post 2005, led to the creation of banking correspondents (BCs), Small Finance
Banks, Small Payment Banks. While in 1991 there were 76 scheduled commercial
banks, excluding the regional rural banks and urban cooperative banks, the
comparable figure now is 93.
From 60,220 total bank
branches in 1991 – 35,206 rural, 11,334 semi-urban, 8,046 urban and 5,624
metropolitan branches, the total grew in 2022 to 158,373 (rural branches -52,773,
the least to grow, semi-urban-43,683 branches; urban branches- 30,638, and
31,279 metropolitan branches). On average a branch covers 9,500 persons now
against 14,000 in 1991.
Businesswise, the
banks had Rs3.8 lakh crore deposits and a Rs1.32 lakh crore credit
portfolio. Three decades later, the deposit portfolio is over Rs155.7 lakh
crore and credit portfolio, Rs108.8 lakh crore. Credit – deposit ratio in terms
of percentage scaled up from 34.2 to 69.88, that is more than twice. The cash
reserve ratio or the portion of deposits that commercial banks keep with the
central bank was 15% in 1991, as against 3%. RBI ensured more liquidity
in the hands of the banks to lend responsibly, while answering the needs of the
society.
Banks have been given freedom
to charge interest rates to different categories of the borrowers based on
their risk perception. The core content changed in the banks. Although
technology took the front seat, cost of banking went up over the years. During
the last eight years, Jan Dhan accounts brought more than 43 crore persons into
the fold of banking.
The decadal data between 2000 and 2020 indicates
growth in advances in both private and public sector banks and their NPAs too.
However, to expect banks to lend without NPAs will be amounting to calling on
banks to give up risk appetite. Also, creating mega banks and Bad Bank would
extinguish neither their toxic assets nor reduce their losses. The government
ignored the experience of the 2008 recession that warned ‘too big to fail’
banks would demand more resources from the exchequer than earlier, when they
created the monolithic SBI and merged major PSBs to be just ten now from 28 in
1991.
Private banks, foreign banks,
and PSBs are not on par in the eyes of the regulator when it comes to meeting
the priority sector obligations. While agriculture, small industries and small
businesses, housing for the poor, education for the poor and transport
including boats and catamarans were the priority sectors post-nationalisation,
their composition and content changed dramatically during the last thirty
years. Indian Banks Association, the lobbying agent for the banks, negotiated
for redefining the priorities from time to time. The forty percent of total
lending earmarked for this purpose is diluted for the poor and disadvantaged –
the very purpose of prioritisation.
Shaktikant Das, RBI Governor, speaking at Ahmedabad
University in 2019, recalled the status of banking pre-nationalisation:
“Five cities in the country, viz, Ahmedabad, Mumbai,
Delhi, Kolkata, and Chennai accounted for around 44% of the bank deposits and
60% of the out-standing bank credit in 1969. This led to the widespread
political perception that, left to themselves, the private sector banks were
not sufficiently aware of their larger responsibilities towards society.”
Quoting RBI’s History of Banking Vol III, he said, “nationalisation of banks
was thought of as a solution for greater penetration of banking that excluded
617 towns out of 2,700 in the country. And, even worse, out of about 6,00,000
villages, hardly 5,000 had banks. The spread, too, was uneven… ”
The 2008 recession also led to demand for
nationalisation in the UK, Australia, and the US to save the interests of the
depositors and bondholders. The very purpose of nationalisation — namely,
serving the unbanked and under-banked — is yet to reach its frontier. Financial
inclusion cannot afford the luxury of complete privatisation. In fact,
coexistence of private and public sector banks will lead to a healthy
competition if governance issues in PSU banks are adequately addressed.
It is wise to turn the pages of reforms suggested by
the Narasimham Committee-II and reiterated at Gyan Sangam-1 (Retreat for Banks
and Financial Institutions), that the government would do well to provide full
autonomy to PSU banks, not interfere in transfers and postings, and issue of
loans. Behest lending should stop with setting goals by the RBI. Owner cannot
be regulator. It can at best be a supervisor to ensure their healthy
functioning. Government seems to have realized that its capacity to supervise
is highly limited and therefore, it would be better to give up such
responsibility. It must have also realized that its ability to improve
governance in PSBs has reached its limits.
However, there is no evidence that all is well with
the private banks, and they can deliver better to the people the banking
requirements than PSBs.
The present government gives
the impression that growth comes from the rich and the rich do not cry on
inflation. They can pursue non-inclusive growth agenda more effectively if they
change the institutional architecture, so that expenditure on institutions
meant for delivering to the poor can be minimised, if not eliminated. This is
undesirable both politically and economically. While privatisation by itself is
not bad, the timing and motive behind the move at the moment, are suspect,
particularly after the consolidation of PSBs took place.
The views expressed are
author’s own. The author is an economist and risk management specialist.
https://timesofindia.indiatimes.com/blogs/fincop/privatisation-of-banks-reversing-the-history/
published on 30.06.2022
