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The Economic Survey for 2019-20, in Chapter 7 on page 158 puts it on record that “PSBs are clearly not efficient today”. This is the statement issued by the owner of these banks. If the argument is being offered as introspection, then it is fair enough. But it appears this argument is being advanced to prepare the ground for a new round of bank privatisation, which raises many questions on the direction and intention of how the government wishes to handle the banks and the banking crisis that faces us today. The statement reveals a world view that sits in contrast to the idea of banking in a country like India.
The government expects the PSBs to deliver on their developmental role in a developing country but at the same time seeks to measure the banks in terms of profitability as any investor would a private business. The two are non-compatible. This also shows that comparing the performance of new age private sector banks with historic and legacy issues of PSU banks is not the correct approach if banking is to be strengthened and made to serve the needs of ordinary people.
Banks should organise their affairs to earn a surplus, i.e. profit, but let us understand the role and purpose of banking in a developing country like India. Public sector banks are put at the vanguard of implementation of all schemes designed for poverty alleviation, rural development, employment generation etc. The Central and State governments implement their Debt Relief Schemes through the PSU banks. The government nominates PSBs to be the Nodal Agency for the implementation of demonetisation, social sector insurance schemes, social sector pension schemes, financial inclusion etc., which contributes to social profit but certainly not to accounting profit. The government also expects PSBs to be the agents for its flagship programmes like ‘Clean India’ by giving access to their lavatories to not only their customers but also non-customers.
.As it stands, the government expects the PSBs to deliver on their developmental role in a developing country but at the same time seeks to measure the banks in terms of profitability as any investor would a private business. The two are non-compatible. This also shows that comparing the performance of new age private sector banks with historic and legacy issues of PSU banks is not the correct approach if banking is to be strengthened and made to serve the needs of ordinary people.
Of course, this does not mean that PSBs should be exempted from delivering efficiency. But we must also note that there are two types of efficiencies. One is operational efficiency while the other is allocational efficiency. On operational efficiency, PSBs have an edge over private sector banks but on allocational efficiency, it is the board or the top management of those banks that play a role. In the Board, the Government i.e. owner, has its nominee, the regulator i.e. the RBI, has its nominee and government appointed directors from the category of depositors, representatives of agriculture, SSI, are appointed. These, almost without any exception, are purely political appointments. Successive governments have been speaking about autonomy but have never given autonomy to the PSU banks in the real sense.
Bank CEOs tend to, on their appointment, bring the bank performance to its bottom by increase provisioning in their first few quarters but nearer to the close of their innings, they tend to take the performance to a high by withholding provisions or providing inadequately. It is not that private sector banks are not subject to this behaviour. Because private sector banks are not governed by CVC, Parliament or the House Committees, but only the RBI and auditors, they have a lesser canvas of management to handle, and they have a lesser number of bosses to please.
Accounting profit is a relatively easy task. PSBs heads are good at this. In a numbers- only approach, PSU heads have mastered the art of delivering figures to please the bosses and show themselves in good light. It has been observed that bank CEOs tend to, on their appointment, bring the bank performance to its bottom by increase provisioning in their first few quarters but nearer to the close of their innings, they tend to take the performance to a high by withholding provisions or providing inadequately. It is not that private sector banks are not subject to this behaviour. Because private sector banks are not governed by CVC, Parliament or the House Committees, but only the RBI and auditors, they have a lesser canvas of management to handle, and they have a lesser number of bosses to please. We know enough about private sector banks already, and their so-called efficiency and performance are also now being questioned.
In India, a critical issue before the PSBs is the huge problem of non-performing assets (NPAs), on which all policies of the government have failed. The Economic Survey itself admits that after exhausting all avenues including the IBC, banks are able to recover hardly 16 per cent of the amount overdue. Relatively, IBC has produced better results but only after huge sacrifices. In effect, the haircut benefits those who should be forced to pay but are sometimes unable and more often than not unwilling to pay back. Here, it is the task of the government to use a heavy hand to protect, preserve and recover the dues of the people of India. If the government is able to provide effective tools to recover these dues, there is no need for the bankers to go begging for capital either to the government or to the market. It is the government’s failure to provide an effective legal framework to recover dues, in which a major share is that of the big corporates, who interestingly seek to be tomorrow’s owners of those PSBs were they to be privatised.
A radical shift to private ownership (part of full) of our largest, strongest and long standing public financial institutions is less to see them grow and more to meet the myopic plans and numbers of a government that has already brought the economy to a sorry state.
It is in the midst of this that the government has proposed the listing of shares of the iconic Life Insurance Corporation of India (LIC) through an IPO. In the process, the government is setting the ball of LIC privatisation rolling. This is a desperate move to achieve the unrealistic disinvestment target to mop up resources on the one count and to contain the deficit on the other count and to implement popular social welfare projects. The government may be facing a resource crunch but the short-term solution of selling shares in LIC makes it worse. The government’s move to disinvest its stake in LIC has long-term effects not only for the economy but also on role of the State in the economy.
The government has its logic in privatising Indian Airlines, on the plea that it is perennially loss making but LIC is a different case. On Rs. 5 crores of initial investment by the government, the current valuation has gone up to Rs. 31 lakh crores and LIC has given Rs.2,611 crore to the Government of India out of its profits of the current year. LIC has always been playing the role of the last resort for the government in times of crisis. LIC’s investments have been giving support to the government.
Despite the introduction of private players in life insurance and they offering more competitive products and services, the common man has always trusted LIC when it comes to life insurance. One reason for this is the sovereign guarantee carried on all LIC policies. Discontinuing that will be LIC’s death knell. Continuing with the sovereign guarantee, as the Finance Minister has reportedly said, raises deep questions on the State standing guarantee for the products and services of a company that has private investors.
In sum, a radical shift to private ownership (part of full) of our largest, strongest and long standing public financial institutions is less to see them grow and more to meet the myopic plans and numbers of a government that has already brought the economy to a sorry state. If the path persists, more misery awaits India.
(The writer is Joint Secretary of the AIBEA (All India Bank Employees Association) and a former director of the Bank of Maharashtra)