Look, A Vestigial Organ is being treated in an Intensive Care Unit!!
Look, A Vestigial Organ is being treated in an Intensive Care Unit!!

On 19th July, 1969, Nation woke up to a pleasant (?) socialist surprise! In mere two shakes of a lamb’s tail, we had 14 nationalized banks! These privately owned banks were brought under state’s control through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance by Indira Gandhi.

Rationale behind this gambit is questioned till date. Though it was depicted to be the furtherance of capital flow towards what has been deemed as a priority sector (Agriculture, MSMEs, etc.’), it is also contemplated that this was a political masterstroke of Indira Gandhi. This measure is said to be used by Indira Gandhi to neutralize the Syndicate, the faction of congress itself that was in bitter conflict with her. Disregarding the disputable political angle to this matter and conjecturing that prevailing economic circumstances of those times demanded state ownership of banks, time has indubitably come to question if PSBs in such a large number are relevant to today’s India.

Everybody ranging from ‘former VC of NITI Ayog’ to ‘Chief economic adviser to government’ and from ‘RBI deputy governor’ to ‘India’s collective demographic dividend’ whose tax money goes in recapitalization of state owned banks on deathbed, hints towards or demands the need of Privatization of state owned banks every once in a while. Call for the privatization grows even stronger when ‘Niravs’ and ‘Malyas’ happen every now and then and it grows feeble as soon as some new breaking news appears and majority seems to forget about these intelligent bank robberies. What needs to be understood is that mounting non-performing assets (bad loans) is not the sole reason to privatize state owned banks, PSBs need to be privatized as they might have suited the needs of some long forgone era but are vastly irrelevant to present times.

One must be naive to think that the disease most of the PSBs seem to be suffering with is merely an issue with the performance, competence and auditing in PSBs and if that is rectified, all will be well. But is it really so? Fiercely trying to find a solution on lack of performance and accountability in PSBs is like trying to cure a vestigial body part. Why bother?! Why not to do away with such an organ that does not serve any purpose. PSBs virtually resemble such a vestigial part, which the economic body is not really in want of but if diseased, can poison the whole banking system and bring it to near collapse. Let us face the vital question, a deaf ear is turned to, whenever it has been raised:

Do we need Two dozen public sector banks in the First place?

In 1969 or later in 1980 when bank nationalization was carried out, one could have argued that PSBs were needed as agriculture and other allied sectors were in want of an immediate attention and easy credit. But, in most of the instances it has been seen that in terms of lending, PSBs have majorly benefited large and medium farmers, leaving marginal farmers behind. Same has been the case with small businesses. Hence, the success of PSBs in outreaching the low income groups and weaker sections remains largely dubious. Albeit, PSB were able to penetrate the rural area notably by branching out. But in today’s era, Digital banking certainly provides a viable alternative to having numerous bank branches.

As far as priority sector lending is concerned, RBI can always issue directives to private banks so that multifaceted growth of economy can be achieved and adequate credit is available for agriculture and allied activities, micro and small enterprises, poor people for housing, students for education and other marginalized sections. The regulatory power that RBI exercises on private banks, makes the case for privatization of public sector banks even stronger.

Evident is the underperformance of public sector banks compared to their private counterparts. The inefficiency, owning to political Interference, lack of accountability, the safety net of recapitalization and inefficient internal governance and administration, public sector banks have grown piles of bad assets and have not succeeded in growing the capital base significantly. Though ‘Insolvency and Bankruptcy code’ has been a pleasant advancement, it too has not been proved to be effective in a significant number of cases. PSBs lack the motivation that competition provides. Economic history of the world tells us that competitive free market with minimum government interference, has always resulted in better performance and efficiency of these organizations and better value to customers. Why should banking sector be any exception then? Won’t privatization of PSBs improve their overall health, performance and in turn facilitate economic growth?!

Having PSBs might have had some meaning Three decades back but certainly does not make sense today. Apart from India only politically communist China has state owned banks in such a large number. PSBs appear vastly redundant today taking into account, the fact that all the motives PSBs were said to be brought in for, could be achieved through private banks as well, under RBI’s supervision. Hence PSBs (perhaps with the exception of SBI) can very well be privatized. Still, no significant steps seem to being taken in this direction hitherto.

Moreover, PSBs appear to merely be pawns in the hands of politicians. Sometimes populist majors must be restrained from for the very good of people. State ownership of banks has been one such populist major used merely to get political backing and social support.

A political purpose was one of the factors behind birth of the PSBs and sadly, that is the only purpose PSBs seem to be serving even today!

3 COMMENTS

  1. The purpose of nationalization was to extend the opportunity of banking small savings to hundreds of millions of excluded people, and to make bank loans available to farmers, micro- small- and medium sized businesses who only had local moneylenders to borrow from. The objective was to take banking to deep rural areas where private banks would not go because of small size of business and lack of profitability.
    Public sector banks are made for socio economic development and they perform., in this process profit is not motive but mass uplift is objective. Private sector banks are profit oriented and no compassion and humanity.

  2. If your apprehension of Public Sectors Banks due to Scams of Nirav Modi or Mallya, then the Public sectors are not in isolation. Financial frauds can manipulate any institutions. Public Sectors banks are targeted, mainly Private Banks are dominating the show.

    In India still many people don’t have bank accounts. There is still shortage of banks in the rural areas. The private sector banks only have their branches in the big cities or towns. But you can only find a public sector bank in small villages.

    • Hello Brijesh, thank you for your response. Yes, frauds can happen in any institution but in Indian bank scenario data suggests that PSBs are the ones suffering with loans gone bad compared to their private counterparts. The reasons are elaborately discussed in the article itself.
      PSBs have huge rural presence is right as well. But it doesn’t justify having non performing banks in such a large numbers. New ways need to be find for the banking coverage of rural area like digital banking or enabling private banks to extend their facilities to rural areas under RBI policy guidance.

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