Is privatisation viable for PSBs?

July 19, 2019, marked the 50th anniversary of bank nationalisation. At the time of nationalisation, bitter opponents of the move were Jan Sangh's Atal Behari Vajpayee and Swatantra Party's Minoo Masani. Coming in that legacy, Modi and BJP cannot obviously acknowledge any positive contribution of bank nationalisation. And so, under Modi, the official discourse on banking reforms has given way to that of bank denationalisation.

Just on the eve of poll results, the former NITI Aayog Vice-Chairman Arvind Panagariya calling for privatisation of at least one public sector bank within the first hundred days of Modi's second term, and Modi's digital banking policy architect Nandan Nilekani calling for privatisation of public sector banks (PSBs), quickly set off media speculation on impending denationalisation.

The 50th anniversary of bank nationalisation offered yet another opportunity for a whole breed of self-appointed neoliberal champions to launch a new crusade for denationalisation. Some crude commentators called bank nationalisation Indira Gandhi's "original sin" and others described it as a 'historic blunder'. More sophisticated ones were clever enough to grant that bank nationalisation did play a significant role in economic development but went on to argue that it had outlived its historic utility. Citing the non-performing assets (NPAs) load and the consequent fiscal burden of bank recapitalisation, they argue that PSBs have now become a big drag on the economy. But there are many questions that go unanswered by these bank privatisation enthusiasts.

One of their main arguments is that private finance has come of age, and they even point to the fact that as per 2019 Forbes ranking, top five banks in the country are private ones and only four out of top ten are PSBs.

Now, let us ask some inconvenient questions.

Why, so far, not a single private corporate house has confidently come forward to offer to take over even a single PSB, even a profit-making one? Can Nilekani dare to moot this idea in his own Infosys board? 21 PSBs have Rs 14 lakh crore worth of NPAs and if we add stressed and doubtful assets, the figure would come to Rs 16-18 lakh crore. On average, each PSB is saddled with bad debts worth more than Rs 50,000 crore. Charmed by overenthusiastic columnists crusading for denationalisation, no capitalist in his right sense would throw good money after the bad to buy such huge liabilities!

Even if there is a rarest of rare chance of some private business house coming forward to take over a PSB in a strategic sale in view of its number of branches and physical reach, they would first insist on sorting out of these NPAs under IBC-NCLT beforehand and cut down staff strength by more than half. Indian business class heaved a sigh of relief when the Supreme Court struck down the February 12, 2018 RBI circular directing the PSBs to take refer defaulters to National Company Law Tribunal (NCLT) for insolvency process under IBC after 50 days of delay. But that wouldn't come in the way of the Finance Ministry directing the banks to speed up this IBC process. Modi Government was ready to use IBC and insolvency process under NCLT only as a mild blackmail lever to recover some money and was not ready to trigger business class' anger by going the whole hog against defaulters. But then, will not a decision to privatise a PSB precipitate matters in this regard and fast-forward the insolvency process of all defaulters?

And, where did these lakhs of crores of bad debts go? Leading left-wing economist Prabhat Patnaik has shown that nearly 60 per cent of this money was plainly looted by businesspersons and did not really amount to business losses. If, in future, Indian businesses are to depend only on private banks like Kotak Mahindra Bank or Yes Bank or on private investment funds like Reliance Capital and Tata Capital for business loans, can they afford to indulge in similar loot? And, in any case, did the Chandra Kochar episode of ICICI Bank and the Cobrapost expose leading to RBI enquiry over money-laundering against Deepak Parekh's HDFC, ICICI Bank and Axis Bank in 2013 show that private bank honchos are saints? Ironically, Deepak Parekh, presently Chairman of HDFC Bank, was also chairman of the notorious IL&FS at the time of many of its controversial dealings. Can the bank denationalisation enthusiasts also enlighten the nation a bit about the shadow banking crisis or crisis of the non-banking finance companies (NBFCs) in India, whose credit would equal a third of PSBs' credit in recent years? Are Indian businesses ready to leave their future credit requirements to these shady private banks and NBFCs after privatising the PSBs?

If the Modi government's case is that they don't have money for bank recapitalisation, then why did they take a huge "haircut", waiving bad debts of corporates in the last two years alone to the tune of Rs 2 lakh crore?

Modi-Jaitley's war with the RBI was over-relaxation of RBI's monetary policy "rigidity" so that there can be bank credit expansion for growth. Can Modi government take for granted similar credit expansion by the private sector credit institutions at its diktats? Can the denationalisation enthusiasts convincingly argue that the PSBs have lost their macro-economic relevance?

The PSBs and RRBs accounted for nearly Rs 12 lakh crore of lending to agriculture in 2017-18. The share of agricultural credit in total bank credit in 1969 was 2.2 per cent and it rose to 18 per cent after nationalisation. Agri credit by private banks is less than 15 per cent of the total agricultural credit by PSBs. Only such massive credits from PSBs sustain agriculture, and even then agriculture is not viable due to various other reasons and there is acute agrarian distress. In such a scenario, can any government afford to wind up the PSBs and leave agricultural credit solely to private banks?

PM Modi wants Jan Dhan for his Digital India. But private banks account for less than 3 per cent of Jan Dhan accounts. But then PSBs have become everybody's favourite whipping boys, including the government's. The bank unions have warned of a strike crippling banking operations if the government proceeds toward denationalisation. Can a stagnant India afford that? IPA

(The views expressed are strictly personal)