Bharat Jhunjhunwala
Finance Minister Arun Jaitley has said that the increase in overdue of bank loans poses a grave threat to the economy. The finance minister has done well to recognise the problem as the global economic crisis of 2008, which originated from the United States, had started from the banking sector.
A similar situation could emerge in India. The finance minister has made it clear that the government will invest more capital in Public Sector Banks (PSBs) to keep them afloat and to prevent the economy from collapsing.
PSBs are particularly vulnerable. Reports indicate that 50 per cent of loans given by these banks have become overdue against only 20 per cent of loans given by private banks.
Indeed, part of the problem is rooted in the general slowdown of the economy.
Businessmen have borrowed money from banks and set up factories. But they are not able to sell their products and are incurring losses. They are, therefore, unable to repay loans.
This problem afflicts PSBs as well as private banks. However, the fact that PSBs have more than double the overdue of loans than private banks cannot be attributed to the slowdown. PSBs face additional problems.
The Vijay Mallya episode has brought the rot in PSBs to light. Mallya has accused State Bank of India of providing loans knowing fully well of the problems Kingfisher Airlines was facing. “The Bank is equally responsible,” he said. The secretary of the All India Bank Officers’ Associations has said that a “powerful nexus between chairmen of PSBs, auditors, Reserve Bank of India and boards of banks is behind the country’s total Non-Performing Assets and wilful defaulters”. He cannot be more correct.
There is a fundamental difference in the attitudes of the top managements of PSBs and private banks. The SBI chairman, who granted the loan to Kingfisher Airlines, did not lose a paisa from her pay or perks despite the default on loan. Kingfisher may have even greased her palm. The income of the top management of PSBs is not necessarily related to the profits made by such banks.
The situation in private banks is entirely different. Incomes are linked to profits the bank makes. Share value of bank would get eroded if the bank incurs losses and he would lose credibility. That means he would not be able to raise loans for future projects. So private banks are diligent in giving loans and their overdues are fewer.
Private bank officials are proactive and constantly interact with borrowers if overdues arise. PSB officials, on the other hand, are content sending reminders. They only need to “show” auditors that they had taken recovery measures than actually ensure repayment.
Indira Gandhi had nationalised private banks to help them serve the poor and not just big businesses. It was aimed at getting banks to open branches in rural areas. But the opening of branches in rural areas has not led to greater availability of loans to the poor.
The credit-deposit ratio of rural branches is about 25. This means that for every Rs100 accepted as deposit, banks are giving out loans of only Rs25. The Rs75 remaining is sent to head offices and given out as loans to bigger businessmen.
As a result, nationalisation has yielded the opposite of what was intended. PSBs continue to sanction loans to big businesses and not the poor. Worse, they are increasing bad loans and suffering losses. The government is imposing taxes on the common man to raise money to infuse more capital in banks. That means the poor are being taxed to support corruption and inefficiency of PSBs. They must, therefore, be privatised.
Banks must privatised and incomes of the management linked with performance of these financial institutions. It was not necessary to nationalise banks to get them to discharge social responsibilities. RBI could have cancelled licences of private banks if they did not open specified number of branches in rural areas and did not extend specified amounts to priority sectors.
Reserve Bank of India failed to undertake this regulation in the Seventies. Indira only tried to solve this regulatory deficit by nationalising banks. But it has only led us out of the frying pan into the fire. Previously, private banks were sanctioning only good loans without extending loans to priority sectors. But now PSBs, too, are making huge corporate loans and also ignoring priority sectors.
It is difficult to regulate PSBs because their “owner” and regulator are one — the secretary of finance. This has led PSBs into behaving like wild horses. The government must focus on regulation of the banking sector. All PSBs must be privatised so that bad loans are not made and the common man is not taxed for supporting the corrupt ways of public sector banking officials.
The choice before the finance minister is either to privatise PSBs and garner monies for other necessary investments, or impose more taxes to support the inefficient and corrupt ways of PSBs.
The author is a former professor of economics at IIM Bangalore.
