Why the government should not bank on privatisation

Why does the Government of India want to sell public sector banks (PSBs)? Are they not serving public purpose anymore? Will their profitability increase under private ownership, and who will apportion that profit? Will the depositors’ money be safer under private management?

The government has a democratic duty to answer these questions before going ahead with its plan announced in the recent Budget — privatising two PSBs, besides the IDBI, this fiscal. Its privatisation obsession should not blind it to private banks’ failures and PSBs' achievements.

The rapid branch network expansion is the foremost achievements of bank nationalisation. By September 2020, the number of bank branches reached 1,60,827 from a mere 8,187 before bank nationalisation in 1969. In rural areas, branches increased from 1,443 to 52,632 during this period, raising rural share from 17.6% to 32.72%. It is another matter that the rural share has fallen from the 58.2% peak of 1990 after the bank 'reforms’.

The scheduled banks' outstanding credit has increased from Rs 3,987 crore in 1969 to Rs 1,07,04,649 crore by January 1, 2021, and the deposits have gone up from Rs 3,035 crore to Rs 1,47,26,753 crore (75.59% of the GDP). Private bank deposits, as of March 2020, amounted to Rs 40,40,424 crore (30.88% share in total) against PSBs' Rs 90,43,443 crore (69.12%). Their outstanding credit was Rs 37,07,435 crore (36.79%) against PSBs’ Rs 63,71,042 crore (63.21%).

The public sector bank coverage of rural areas was far better than their private counterparts. The PSBs (including RRBs) have 44,397 rural branches (84.35% of total rural branches) whereas private sector banks have only 8,235 rural branches with a 15.65% rural share. However, the present number of 52,000 rural branches — of both PSBs and private — against more than six lakh villages implies there is no bank branch in at least 87% of villages. Also, private banks are lagging in the deployment of rural ATMs, with 6,112 (18.34%) out of the total 33,312, as of 2020-end.

Turning to profits, private banks cannot match PSBs in their profit earning in its true sense, not only because public sector banks have higher risk-taking capacity but also due to the dual nature of their profitability — social and commercial profits. Social profit comprises improving banking service accessibility in unbanked areas and to the weaker sections of society; this type of profit is intangible and measured in terms of an increase in incomes, output and employment in the country.

The very need for nationalisation arose due to the failure of the private sector in the area of commercial viability and the protection of depositors’ money, let alone any social profit. Many banks failed in British India. One prominent reason for their liquidation was combining trading activity with banking. Trading houses like Alexander and Co, and Ferguson and Co set up banks at that time. The bad experience of their failure and the suffering of the depositing public had led to the legislative ban on combining trade with banking. In other words, the opinion against corporates controlling banks was seminal even during those days.

After Independence too, the private bank experience was no good; 559 banks failed between 1947 and 1969. Nationalised banks have bailed out the failing private banks. Twenty-five private banks were merged with public sector banks from 1969 to 2020 as per AIBEA’s compilation; the YES Bank’s bailout by the State Bank of India is the latest example.

Reverting to social profit, three other achievements of PSBs, besides their spread in unbanked and rural areas, merit a mention here. One, they operate 97.2% of the 41.98 crore Jan-Dhan accounts in the country. Their share of these accounts in rural areas is still higher at 97.50% against the 2.5% share of private banks. Two, PSBs (including RRBs) have bank-linked more than 80 lakh SHGs (78% of the total 1.02 crore). The outstanding amount of SHG loans of these banks was Rs 94,291 crore as of March 31, 2020 (87.25% of the total Rs 1.08 lakh crore) against private banks’ share of a mere 7% in number 6.70% in amount.

Support to farming

More important than the preceding two or anything else is the PSBs’ support to farming. Their outstanding agriculture credit was Rs 4,50,207 crore (86.6% in total credit to agriculture) as of March 2020, against the private banks’ Rs 72,893 crore (13.94%).

Despite wielding higher social responsibility, the PSBs' operating profits during the five years (2015-16 to 2019-20) aggregated to Rs 7,77,043 crore. The huge provisioning, Rs 9,84,415 crore towards bad loans turned them red, with Rs 2,07,372 crore net losses.

Bank unions say that the loan default was wilful — meaning those who had the capacity could evade the payment. And they argue that most of these bad loans belong to private corporates. The quantum of bad loans written off from 2001 to 2019 amounted to a whopping Rs 6,94,037 crore.

The NPAs, as can be seen from the Economic Survey 2020-21, are not exclusively generated in PSBs. The NPAs of private banks, up to March 2020 amounted to Rs 2,05,848 crore against Rs 6,87,317 in public sector banks.

The loans have become bad due to the corporate customers’ default; the written-off sum of 50 corporate customers aggregates to Rs 68,607 crore. The idea, therefore, of transferring bank ownership to loan defaulters makes no sense.

The right solution for correcting the functioning of public sector banks would be putting in place a better regulation and control mechanism. If the government finds flaws in PSBs' functioning, it has every reason to correct them, but it should not throw the baby out with the bathwater. On the contrary, there is every reason and scope for the nationalisation of private banks, not the other way round if public and government interests converge.

(The writer is a development economist and commentator on economic and social affairs)