Nationalisation of banks will only cripple Indian businesses. Privatisation, on the other hand, will bring in more efficiency and accountability, especially in priority sector lending.

Bharat Jhunjhunwala

THERE is a perception that public sector banks (PSBs) are hard on recovery of small amounts from farmers and small-scale industrial units while they go easy on big borrowers.

There is a saying in banking circles that a borrower comes in a Maruti car to take a loan but in a Mercedes to settle the overdue.

But are the PSBs truly light on the big borrowers? The non-priority sector lending of the PSBs was 58.8 per cent of their total lending according to the economic survey.

The share of these big borrowers in the non-performing assets (NPAs) was 51.2 per cent.

The share of non-priority sectors in NPAs was lower than their share of total borrowing. This means the recovery rate of the non-priority sectors was better than the priority sector's.

The Reserve Bank of India reached the same conclusion in its Bulletin of March 2004: "Another interesting point which has been raised about NPAs is that there is an impression that priority sector lending has large NPAs. The statistics might or might not confirm this. If you take priority sector and remove the government sponsored programmes on the one side, and if you remove public sector (IOC, ONGC, other banks) component from non-priority sector, there might be only a marginal difference in NPAs of bank lending to priority sector and bank lending to the private corporate sector."

The allegation that the PSBs are giving latitude to the big borrowers is, therefore, not justified. Yet, it is true that the farmers constitute the bulk of the indebted committing suicides.

One reason could be the large number of small borrowers. However, it is possible that a small percentage of borrowers from both categories may fail to recover their debt and may be pushed to extreme decisions.

This should not be attributed to the unjust attitude of the PSBs. The more important question is why should such a huge loan amount be overdue? According to the economic survey, the NPA of the PSBs were 7.8 per cent of the money lent. The figure was 5.8 per cent for private banks and 4.6 per cent for foreign banks.

Without taking into consideration the foreign banks, why should there be such a big difference between public sector and private banks?

Two per cent of all that is overdue will be recovered if the PSBs are privatised and their efficiency rises to the level of private banks'.

Indira Gandhi had nationalised the private banks so that the poor get adequate credit. The poor did get a lot of credit, but the banks became inefficient just like the Russian and Chinese government-owned industries. The Left parties should understand the nature of the State's bureaucracy. They should pursue such policies that keep the size and power of government bureaucracy at the minimum, while expanding employment for the poor and taxing the rich.

The Left parties recommend stringent action against the big defaulters, such as disclosing their names to the public.

Those who refuse to pay should be severely penalised. The government should draft a law to this effect. The penalty should extend to those officers and politicians instrumental in obtaining the loan.

The emphasis on strict measures for recovery of loans overdue is a step in the right direction. The overdue loan amount is already in excess of 2 per cent because private banks were nationalised.

Nationalisation of banks will only cripple Indian businesses. Surely, the objective of extending more loans to the priority sector and the rural areas could have been secured by creating laws and issuing relevant instructions to the private banks.

They would have brought efficiency to priority sector lending. Nationalising them was a mistake. The Finance Ministry should now undo the damage by privatising the PSBs.

(The author, a freelance writer, can be contacted at:

(This article was published in the Business Line print edition dated April 16, 2005)
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