PSM Rao
Why does the government of India want to sell the Public Sector Banks? Are they not serving the public purpose anymore? Will their profitability surely increase under private ownership, and who will apportion that profit? Will the depositor’s 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 the private banks’ failures and the PSBs’ achievements.
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The rapid branch network expansion is the foremost achievement of banks’ nationalisation. By September 2020, the number of bank branches has reached 1,60,827 from a mere 8,187 before the bank nationalisation, in 1969.
In rural areas, the bank branches increased from a mere 1,443 in 1969 to 52,632 by September 2020, raising rural share from 17.6 per cent to 32.72 per cent. It is another matter that the rural share has fallen from 58.2 per cent peak of 1990 after the bank ‘reforms’.
The Scheduled banks’ outstanding credit has increased from `3,987 crore in 1969 to `1,07,04,649 crore by January 1, 2021 and the deposits have gone up from `3,035 crore to `1,47,26,753 crore (75.59 per cent of the GDP). The private banks’ deposits, as of March 2020, amounted to `40,40,424crore (30.88 per cent share in total) against the PSU banks’ `90,43,443 crore (69.12 per cent). Their outstanding credit was `37,07,435crore (36.79 per cent) against PSBs’ `63,71,042 crore (63.21 per cent).
The public sector banks’ coverage of rural areas was far better than their private counterparts. The PSBs (including RRBs) have 44,397 rural branches (84.35 per cent of total rural branches) whereas the private sector banks have only 8,235 rural branches with a 15.65 per cent rural share.
However, the present number of 52,000 rural branches, of both PSBs and private, against more than six lakh villages, imply no bank branch in at least 87 per cent of the villages.
Also, the private banks are lagging in the deployment of rural ATMs with 6,112 (18.34 per cent) in total rural ATMs of 33,312, as of the end of 2020.
Turning to profits, the private banks can never match the PSBs in their profit earning in its true sense, not only because the public sector banks have higher risk-taking capacity but due to the dual nature of their profitability- social and commercial profits.
Social profit comprises, improving banking services accessibility in the unbanked areas and to the weaker sections of the society; this type of profit is intangible and measured in terms of the 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 during British India. One prominent reason for their liquidation was combining trading activity with banking. The trading houses like Alexander and Co., and Ferguson and Co. set up the banks at that time. The bad experience of banks’ failure and the suffering of the depositing public had led to the legislative ban of combining trade with banking. In other words, the opinion against corporates controlling banks was seminal even during those days.
After Independence too, the private banks’ experience was no good; 559 banks failed between 1947 and 1969.
The nationalised banks have bailed out the failing private banks. Twenty-five private banks were merged with the PSBs 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 the social profit, three other achievements of PSBs, besides their spread in unbanked and rural areas, merit a mention here. One, they operate 97.2 per cent of 41.98 crore Jan-Dhan accounts in the country. Their share of these accounts in rural areas is still higher at 97.50 per cent against the 2.5 per cent share of the private banks.
Two, the PSBs (including RRBs) have bank-linked more than 80 lakh SHGs (78 per cent of the total 1.02 crore). The outstanding amount of SHG loans of these banks was `94,291 crore as of March 31, 2020 (87.25 per cent of the total `1.08 lakhcrore) against the private banks’ share of a mere 7 per cent.
Three, more important than the preceding two or anything else is the PSBs’ support to farming. Their outstanding agriculture credit was `4,50,207crore (86.6 per cent in total credit to agriculture) as of March 2020 against the private banks’ `72,893 crore (13.94 per cent).
Despite wielding higher social responsibility, the PSBs’ operating profits during the five years, 2015-16 to 2019-20 aggregated to `7,77,043 crore. The huge provisioning, `9,84,415crore towards bad loans turned them red, `2,07,372 crore net losses.
The bank unions say that the loan default was willful- 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 `6,94,037crore. The NPAs, as can be seen from the economic survey 2020-21, are not exclusively generated in the PSBs. The NPAs, of private banks, up to March 2020 amounted to `2,05,848crore against `6,87,317 in PSBs.
The loans have become bad due to the corporate customers’ default; the written-off sum of 50 corporate customers aggregates to `68,607 crore. The idea, therefore, of transferring the bank ownership to the loan defaulters makes no sense.
The right solution for correcting the functioning of the PSBs would be putting in place a better regulation and control mechanism. If the government finds flaws in the 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.
