Fifty years ago, on 19 July 1969, the Indira Gandhi government had nationalised 14 banks, which together controlled 85 per cent of the bank deposits. Even today, the PSU banks control a substantial percentage of the deposits. Since 2017, a total of Rs 2.7 lakh crore has been infused into the public sector banks even as they are burdened with bad assets and show reluctance in lending.
ThePrint asks: 50 yrs of bank nationalisation: Is Modi govt worsening PSU banks’ problems or resolving them?
Modi govt is fixing health of public sector banks by not giving out reckless loans like UPA
Narendra Taneja
National Spokesperson, BJP
The effort of the Narendra Modi government is to strengthen the bottom-line health of all public sector banks in India and address all issues pertaining to their recapitalisation on priority. Under both UPA 1 and UPA 2, loans were given in a very reckless manner and mostly on the basis of political considerations and connections, ruining the health, self-confidence and self-esteem of these banking institutions in the process. Big loans were regularly granted only on the basis of a phone call from UPA politicians. In short, the Congress-led UPA destroyed the Indian banking system structurally. We were shocked to discover the scale of this destruction when we moved into the cockpit in May 2014. It was tough, but all fundamental and structural damages have been repaired.
At a banking conclave in Pune, Prime Minister Modi told the assembled CMDs of public sector banks not to listen to any politician and to run their banks in the most professional manner. The mantra given was: be professional, be transparent and be world-class. The results are there for everyone to see. The banking sector has been completely de-politicised.
Public banks are crucial to India’s economy and overall well-being. Our banks today are better equipped than ever before to serve the common man as well as the industrial sector.
Also read: Political stunt? Why Indira Gandhi’s bank nationalisation was questioned even 50 years ago
Modi govt is only going for short cuts and worsening the problem of public sector banks
C.H. Venkatachalam
General Secretary, All Indian Bank Employees Association
Indians have deposited savings worth Rs 127 lakh crore in public sector banks. This is because private banks are infamous for not handling public money properly. The working mechanism of PSUs need to be strengthened, which is not being done by the Narendra Modi government.
Public sector banks need to be open to everyone – they are meant for that very purpose. But the Modi government is restricting banking access by closing branches across the country. They say ‘banking for all’ in Jan Dhan Yojana, but they are doing the exact opposite by restricting banking outlets.
Banking credit must be available to give more loans for rural development, agriculture and education. However, there was no emphasis on this in the Budget.
Bank loans should lead to development, which is not happening under the Mudra scheme – it is being used as a political ploy. Banks are facing bad loans worth more than Rs 13 lakh crore currently, from which they do not earn any interest.
Modi government is only going for short cuts, which will have an adverse long-term effect on the banks, thereby worsening the problem of PSUs.
Bank nationalisation had both pros and cons. But reforms have, at best, been ad hoc & patchy
Anil Khandelwal
Former chairman and managing director, Bank of Baroda
Y.V. Reddy, former governor of Reserve Bank of India, recently observed: “Banks were nationalised at the whim of a Prime Minister, they will be de-nationalised at the whim of another Prime Minister”. While I completely endorse the first part, I am not too sure of the second, which requires deep thinking.
The unmistakable good of nationalisation has been that, in one stroke, banking became accessible to the common man, contributing significantly to ameliorate poverty. It is, however, a different thing that over the years, nationalised banks have been used by the political class to further their own interests through the loan melas, loan waivers, thereby weakening the basic fabric of banks.
Stockpiling of NPAs, rising bad debts and perpetration of large value frauds do not bode well for the sector. The reforms, at best, have been ad hoc and patchy.
Modi government needs to come out with bold measures to reform the banking sector. Some suggested measures could include:
1. Bringing down the government stake below 33 per cent, mainly to provide the much needed autonomy and keep banking beyond the purview of investigative agencies.
2. Substantially improve corporate governance by ensuring that the persons on boards are competent professionals from diverse backgrounds. No political party should put its idealogues or functionaries on these boards.
3. Continue the consolidation process through the creation of four-five large entities with CEOs with five-year tenures.
Also read: 50 years after nationalisation, Modi needs to starve PSU banks, not celebrate them
Time to think about bolder reforms such as privatisation of public sector banks
Radhika Pandey
Fellow, NIPFP
Most arguments for bank nationalisation are based on the premise that profit-maximising lenders do not deliver credit where the social returns are highest. This rationale was perhaps the motive behind nationalisation of banks in 1969 and 1980.
Last three decades have shown us that state ownership generates moral hazard and perverse incentives in the banking sector. Ready access to government guarantees and forbearance has led to substantial misallocation of resources.
As a consequence, key financial indicators of public sector banks continue to reflect problems. While the overall gross NPA ratio has declined to 9.3 per cent (end March 2019), the gross NPA ratio of public sector banks continues to be in double digits at 12.6 per cent. The credit growth of public sector banks continues to lag behind their private sector counterparts.
The standard response to the growing problems of public sector banks has been to recapitalise these banks. However, the scale of recapitalisation has increased substantially over the last five years. Around Rs 3 lakh crore of tax-payer money has been infused in public sector banks in the last five years.
There is a need to rethink the strategy on public sector bank reforms. Successive governments including the current government have focused on elements of bank consolidation, setting up of bank board bureaus, etc. These responses do not address the fundamental issues of incentive structure of public sector banks. Perhaps, this is time to think about bolder reforms such as privatisation of public sector banks.
Views are personal
By Revathi Krishnan and Fatima Khan
1. I think ownership of Public Sector Banks (PSBs) is not at all the core issue; it is how we manage these banks. 2. One can understand why the Union government has no other option but to provide funds to boost capital of PSBs. 3. But let us face the bitter truth: providing money to PSBs towards their diminishing capital is just a temporary measure, as financials of almost all PSBs are very weak. 4. When UPA was in power it had appointed a committee to suggest revamp of PSBs. Former CEO of UTI Bank Mr. P J Nayak, who as we all know was, before joining UTI Bank a senior official in the Union Finance Ministry (UFM), was head of this committee, which duly submitted its report with its recommendations. Unfortunately, however, then Union Finance Minister and UFM officials did not consider implementation of any of the recommendations of P J Nayak Committee. 5. Subsequently, when NDA came to power in 2014, Union Finance Minister, in consultation with PMO perhaps, decided to set-up a new authority called Bank Boards’ Bureau (BBB), which it was initially thought would act as a think tank. Idea was that PSBs will be benefited by advice of BBB. This did not happen. We know why this has not happened: it is to be noted here that UFM officials have finessed art of interference in PSBs, irrespective of which party is in power, and they won’t allow anyone to curb their powers of interference. This is the truth. 6. Unfortunately, right now the banking regulator Reserve Bank of India too appears helpless. Therefore, I feel that to deal with PSBs’ current problems, UFM and RBI can jointly sign Memorandum of Understanding with Boards of each of the PSBs. Boards of PSBs can be given autonomy, after deciding clearly limits of autonomy, which would be with accountability.
It is wrong to blame bank nationalisation done 50 years ago for the present crisis in the public sector banking. Strictly speaking, the crisis doesn’t pertain to government owned banks alone, but to all banks who heavily lend to the corporate sector. Bank nationalisation mandated banking system to go for priority sector lending under various schemes. But that has no harmed balance sheets of PSU Banks to any significant extent. What has harmed PSU Banks and heavyweight private sector Banks like ICICI and Axis is big ticket loans given to corporates and the demise of term lending institutions. Commercial Banks, whose mainstay should be in short-term working capital loans have now entered in a big way to grant medium term and long term loans. This is the root cause of today’s banking crisis. As against this scenario, banks who excel in retail lending are doing fine. In the last two years, the trend is that corporate lenders have restrained themselves in expanding its wholesale big ticket loans portfolio and have shifted to retail lending. Even when interest rates have been lowered, this trend. has not not been reversed. The consequence is the slowdown in the economy. In the meanwhile, the financial position of many PSU Banks has improved and their NPAs have been considerably reduced. Applicability of strict lending norms, more particularly the leverage ratios, better appraisal skills and monitoring is the only way out to come out of this imbroglio.. Cautious approach has to continue and corporates should think of alternate routes to fund their their big ticket projects. Resorting to Bond market could be one of the solutions.
Banks can lend to who they wish to and how they wish to, as long as they are not allowed to pick the tax payer’s pocket. Banks should be allowed to go bust, for their wrong decisions, not propped up by tax payers money. Right now India’s PSBs have become a conduit to channel funds from tax payers into the pockets of bankers, politicos, bureaucrats and crony capitalists.
Perfect summation, sir. A scholar would say this in a three hundred page thesis and earn a doctorate.
The binge – partly to counter 2008, but much more to promote infrastructure- that has caused almost terminal damage to the PSBs was exceptional. However, this does not mean the these government owned banks have been flying high for half a century. Always burdened with social sector obligations, financial repression, plus lots of good natured phone calls from Delhi, as the owner of 85, declining now to about 70, per cent of the banking system in a developing economy, the government ought to have been awash with dividends and bonus shares. Not periodic calls for mid air refuelling, about 2.7 trillion in the last three years. 3. The IBC is a worthwhile reform, which will have to be further refined in light of experience gained. Beyond that, nothing of note, some tinkering at the margins with stuff like Bank Boards Bureau. IDBI Bank is a particularly egregious example of doing the wrong thing. Or the election oriented MUDRA. Nothing except privatisation will work. Japan has zombie companies. We might end up with a zombie banking system.