Opinion

Privatising public sector banks isn’t a good idea

PSM Rao | Updated on April 06, 2021

Data show NPAs are not exclusive to PSBs. Also, in terms of rural outreach and farmer support private banks are laggards

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

The government should answer these questions before going ahead with its plan to privatise two PSBs, besides IDBI, this fiscal. Its privatisation obsession should not blind it to private banks’ failures and the PSBs' achievements.

The rapid expansion in branch network has been the foremost of achievements of bank nationalisation. By September 2020, the number of bank branches reached 1,60,827 from a mere 8,187 before the bank nationalisation in 1969.

In rural areas, the bank branches increased from 1,443 in 1969 to 52,632 by September 2020, raising the share of rural branches from 17.6 per cent to 32.72 per cent. It is another matter that the rural share has fallen from the 58.2 per cent peak of 1990 after the bank ‘reforms’.

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 GDP).

Private banks’ deposits, as of March 2020, amounted to ₹40,40,424 crore (30.88 per cent share in total) against PSBs’ ₹90,43,443 crore (69.12 per cent). Their outstanding credit was ₹37,07,435 crore (36.79 per cent) against PSBs’ ₹63,71,042 crore (63.21 per cent).

 

Rural branches

Public sector banks’ coverage of rural areas was far better than their private sector counterparts. The PSBs (including RRBs) have 44,397 rural branches (84.35 per cent of total rural branches) whereas the private banks have only 8,235 rural branches with a 15.65 per cent rural share. However, the present 52,000 rural branches (of both PSBs and private banks) vis-a-vis the more than six lakh villages in the country imply no bank branch in at least 87 per cent of the villages.

Also, 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 2020.

Turning to profits, private banks can never match PSBs in in the real sense, due to PSBs’ higher risk-taking capacity and 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 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 social profit.

The nationalised banks have bailed out the failing private banks. Twenty-five private banks were merged with 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 social profit, three other achievements of PSBs, besides their spread in unbanked and rural areas, merit a mention.

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 private banks’ 2.5 per cent.

Two, PSBs (including RRBs) have bank-linked more than 80 lakh self-help groups (78 per cent of the total 1.02 crore). The outstanding amount of SHG loans of these banks stood at ₹94,291 crore as of March 31, 2020 (87.25 per cent of the total ₹1.08 lakh crore) against the private banks’ share of a mere 7 per cent in number 6.70 per cent in value.

And, more important, is PSBs’ support to farming. Their outstanding agriculture credit was ₹4,50,207 crore (86.6 per cent in total credit to agriculture) as of March 2020 against private banks’ ₹72,893 crore (13.94 per cent).

Despite wielding higher social responsibility,PSBs’ operating profits during the five years 2015-16 to 2019-20 aggregated to ₹7,77,043 crore. The huge provisioning, ₹9,84,415 crore towards bad loans, pushed them into the red — net loss of ₹2,07,372 crore.

Bank unions say that the losses were largely caused by wilful defaulters — that is, those who had the capacity to repay but chose to evade. 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 ₹6,94,037 crore.

Non-performing assets (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 ₹2,05,848 crore against ₹6,87,317 crore in PSBs.

The loans have become bad due to 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 PSBs would be putting in place better regulations and control mechanisms. If the government finds flaws in the functioning of PSBs, 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, and not the other way round, if public and government interests converge.

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

Published on April 05, 2021

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