Turning liability to asset

Merely privatising the PSBs will get us nowhere. Along with this move, the Government must bring sector-specific reforms. And they must come quick

The Reserve Bank of India (RBI) in its Financial Stability Report released on July 24 warned that the Gross Non-Performing Assets (GNPA) ratio of scheduled commercial banks (SCBs) could rise up to 14.7 per cent by March 2021 from the current 8.5 per cent in March 2020. This piece of news was followed up by former RBI Governor Urjit Patel’s shocking revelation that the central bank wanted to be tough against the loan defaulters but the Government wanted him to “go soft”, which eventually forced him to resign. A series of happenings in the banking sector in recent times has made everyone doubt the character and intentions of the current Government to recapitalise public sector banks (PSBs).

Recently, the All India Bank Employees Association (AIBEA), too, released a list of 2,426 borrower accounts that have been categorised as “wilful defaulters” with dues amounting to Rs 1,47,350 crore to the banking system. It also mentioned that such huge amounts are being technically written off by the NDA Government. Moreover, recently, the Union Government announced that only five PSBs would continue to exist and that the rest of the unmerged banks would be sold off to private bidders in the name of recapitalisation. Only last year, the Government had merged 10 State-owned banks into four, creating a handful of larger banks in the process.

On the one hand, the Government is trying to infuse private capital into the PSBs and on the other, it is forcing both the State Bank of India (SBI) and Life Insurance Corporation (LIC) to bail out failed private sector banks such as Yes Bank. The statements and actions of the Government appear to contradict each other. A comparison of the BSE PSU bank index vis-a-vis BSE Sensex from 2014 to 2020 reveals that the former has seen no growth in the last six years while the latter has seen a steady rise. The BSE PSU bank index has instead fallen by 2.63 per cent, while the overall index has grown approximately by 11 per cent on a CAGR basis. This clearly reflects that investors are not happy with the way the PSBs have been functioning.

On the one hand, the Government is pushing for a technical write-off of bad loans, on the other, it has failed to investigate or punish the willful defaulters. This is evident from the fact that SBI has been recovering less than one per cent of its write-offs each year. As per reports, SBI’s technical write-off of bad loans in the last eight years amounted to Rs 1.23 lakh crore, while recovery from bad debts during the same period was less than Rs 9,000 crore, which is less than one per cent of the collection efficiency every year.

Around 84,545 fraud cases — involving about Rs 1.85 lakh crore — were reported by scheduled commercial banks and select FIs during 2019-20 as per RBI in an RTI response. This takes the total loss to Rs 3.6 lakh crore due to frauds in the last six years (FY 2014-15 to 2019-20). Since July 19, 1969, when 14 banks were nationalised, they have been contributing immensely to build credit lines for the marginalised sectors like agriculture. The National Credit Council, in its meeting held in July 1968, emphasised that commercial banks should finance priority sectors like agriculture and small-scale industries.

Over the years, the priority sector lending norms have seen major changes and have, in fact, evolved with a greater focus on those segments that have traditionally been neglected from accessing credit. Thus, it has become a handy tool to address the problem of financial exclusion.

In the latest report of its Internal Working Group to review agricultural credit, the RBI said that the impact of the institutional framework put in place has largely leveraged formal credit to the agriculture sector. From Rs 37.71 billion in 1981 (approximately 16 per cent of the agricultural GDP in 1980-81), the SCBs’ outstanding advances to agriculture and allied activities have grown significantly to Rs 13,694.56 billion in 2017-18, which formed approximately 16 per cent of total bank credit ie, Rs 86,254.25 billion and approximately 51 per cent of agriculture and allied GVA at current prices.

Merely privatising the PSBs will get us nowhere. Along with this move, the need is for sector-specific reforms. In his book, What the Economy Needs Now, Rajan has suggested that privatisation be just one element of the overall reform process. It should not become the foremost plank in banking sector reform and is fraught with adverse consequences.

To put it simply, Rajan is of the view that “simple” solutions like privatising PSBs may be no panacea. Consolidation and privatisation of PSBs can have little to do with setting Indian banking right as these actions may be necessary but will not be sufficient by a long chalk

The Government should clarify its approach to steer the PSBs out of the crisis. It should come up with a white paper that must be prepared in consultation with top economists, former Finance Ministers and RBI Governors among others. The white paper should include divestment plans for PSBs. A  thorough investigation into the divestment process, too, is a must. Further, steps must be taken to ensure utmost transparency in the valuation of brand, network and the value for the number of accounts created over the last 51 years through significant brand-building.

The Government also needs to clarify the future of bank employees. The challenge is also for it to continue providing cheap agricultural credit to the farmers once the entire banking sector becomes driven by the private sector. No doubt, the state of the PSBs has been of great concern to a common citizen of our country. The country needs them to perform better. Delayed recognition of the inevitable has haunted India’s financial sector. Reforms must come quick.

(The writer is professor of finance and national spokesperson of the Congress. Views expressed are personal)

Source: The Pioneer