Banking Article, Banking Finance 2022, Banking Finance February 2022

Privatisation of PSBs a New Panacea

The country is going through a discussion about privatisation of PSBs and Government is vigorously pulling up for the same. There are two type of  thoughts involved one in favour and another against it, Those in favour are giving several logics like PSBs are saddled with NPAs, PSBs are in dual control one by RBI through RBI Act 1934 and one by Finance Ministry By BR Act 1949. So at times Governments through their ministries use PSBs as a tool to further their political gains. PSBs don’t have sufficient Autonomy so they are weak in their business decisions. There is also difference in incentives than their private counterparts which can motivate them to do better. But here we have to understand the goals for which these banks were nationalized i.e. to transfer economic prosperity to untouched masses, to serve the unserved.

The Concept behind Nationalization:

On 19th July 1969 14 Scheduled Commercial Banks were privatised having aggregate deposit of approx. Rs 50K crores. The major purpose for the same was to make banking services accessible to the last person in the society. Since then Banks have served their purpose in form of Rapid economic development, to lower the problem of un employment, making banking services accessible to small and marginal farmers, helping small traders and artisans like weavers. Making the banking service reach to the man clutched in the hand of moneylenders in short,meeting the goals of financial inclusion.

Issues with Private Sector Banks:

1. Governance Issues:

ICICI Bank Ex MD and CEO Ms Chanda kochhar is facing investigation by ED (EnforcementDirectorate) under the money laundering case along with her husband Mr Deepak KochharandVenugopal Dhoot of Videocon Group for alleged irregularities in sanctioning of Rs 1875- Crore loans to the corporate group. On similar lines In Yes Bank RBI imposed moratorium on 5th Mar 2020 because of bad investments, manipulation of Balance sheet and dumping of holdings by their founders. This led to Yes Bank loosing approx. 85 % in value and condition of Bank run has occurred.Chennai based Lakshmi Vilas Bank also faced sanctions from RBI in 2020 because of erosion of Bank’s net worth , low level of liquidity and increase in NPA’s.

2. Manipulation of NPAs :

In 2015,2016 and 2017 RBI caught Yes Bank for under reporting of its NPAs and continuous ever greening of bad loans in form of restructuring these bad loans. In March 2019 Moody’s estimated their NPA to stand at 8 % (Which is very high rate compared to countries like UK, Australia and Canada having NPA of less than 1% followed by China, Germany, Japan and USA having NPA less than 2%). Yes Bank was under reporting NPAs to the tune of 11000 crores while Axis Bank was having divergence of Rs. 14000 Crore and ICICI Bank was having divergence of Rs 5000 crore alone in FY 2016.( Source. The Hindu business Line)

The Way out:

Gunnar Myrdal a Swedish Economist and Nobel Laureate of 1974 has advocated about government ownership in India as well as in Asian Countries. “Specifically, government directors appointed by the government owner can better represent creditors’ interests, supplement incomplete banking regulation and supervision, and reduce informational asymmetry between the banking regulator and banks.” What we needed right now is some reforms like making banking free from dual clutch thus making it impossible to be used by governments to further their political gains. To make stringent norms to recover Bank’s NPAs so that to avoid provisioning and stabilising capital erosion. Governments should provide more autonomy to PSBs boards to make their commercial decisions independently.

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