What’s the role of public sector banks?

Public discussion so far on the ₹11,300-crore fraud perpetrated by Nirav Modi on Punjab National Bank has been one-sided, with public sector banks being pilloried. State Bank of India chairman Rajnish Kumar has now come forward to stoutly defend the banks’ space.

Kumar has observed that as all the firms with huge unpaid bank loans which have come up before the National Company Law Tribunal are privately owned, private ownership does not automatically result in good governance.

This is a bit disingenuous. They are arraigned because the system is seeking to take them away from their owners who are unable to run them viably. Talk of privatisation of state-owned banks has arisen because they are seen to be sinking in bad debts. The principle is the same: owners behind incompetent managements which run up huge losses need to be removed.

Threat of closure

Before economic liberalisation came, many loss-making private sector organisations were nationalised to save jobs. There is a plan to wind up some continually loss-making nationalised concerns which have no hope of recovery. Recently, several such pharmaceutical concerns have been earmarked for closure. If no meaningful bids are forthcoming for some firms before the NCLT, they will surely be liquidated.

Public ownership of businesses is not intrinsically unsound. Utilities and businesses which face little competition but serve a public need are typical candidates for state ownership.

An alternative system is to rigorously regulate them, which amounts to undeclared partial public ownership as regulation takes away many of the prerogatives of private owners.

Right now, there is an intense debate in the UK over whether or not the railways should not be re-nationalised. A significant section of citizens, mostly supporters of the Labour Party, feels that the privatisation initiated by Margaret Thatcher has not worked. In reality, today three-fourths of the industry (track, signalling, big stations) is already under public control. Thus, it is too early to bury the idea of state ownership.

Also, state ownership and efficient management can coexist, though that’s the exception rather than the rule. Steel Authority was well run under V Krishnamurthy. As global steel demand improves, it can again deliver better numbers. But the same cannot be said about Bharat Heavy Electricals as its staple, coal-fired power plants, have had their day as dirty fuels are today a dirty word.

This brings us to a key issue about public ownership. Environmental concerns can tilt the balance in its favour. A wide railway network which reduces the need for people to take out their fossil fuel-driven cars is preferred both on environment and safety grounds.

Till electric cars become common, maybe after 2030, the choice in some cases is really between private operations with public support versus straightforward public ownership. The British experience is that it is difficult to ensure adequate investment (necessary for safety) under private ownership. There are similar intrinsic merits in public ownership of basic healthcare and education.

But can we stretch this to banking? Kumar says that only PSBs can be expected to take banking to “troubled and remote parts of the country”.

This is no longer true. Bank nationalisation took banking to these parts up to a point, but a substantial gap remained in achieving financial inclusion. Microfinance organisations and those among them which have become small finance banks can and do go to parts of the country where PSBs go reluctantly and often only in a token way.

Basic differences

Plus, there is a big cultural difference. PSBs are mostly manned by staff from urban areas who go to rural branches to mark time to qualify for further promotions. They are dismissive of and often rude to unlettered and poor customers, rural or urban, who must be hand-held through the banking experience.

Microfinance staff, often hailing from non-urban areas, treat their customers far better and are far more supportive. The microfinance model, inherited by small finance banks with a recovery rate of 98 per cent plus, is hugely superior when it comes to unsecured small lending.

So we come back to the basic question: What will PSBs do which other banks will not? It can be said that only they will fund essential large infrastructure projects as, after they have burnt their fingers over such projects, private banks will keep away from them. We are essentially saying that PSBs should be asked to continue with the kind of lending that gave them huge NPAs in the first place. Maybe, but this is not a happy situation.

Where Kumar is right is in saying that the public discussion should focus on how to ensure that such frauds are not repeated. The only way to ensure that PSBs are properly run is to put in place professional managements and insulate them from political interference. Aware of this need, the NDA government created the Banks Board Bureau and put the former CAG, Vinod Rai, at its head. But after doing this the Government did not give it the space it needed.

Political interference, particularly in appointments, through finance ministry officials, continued. Thus, the political culture of the country, be it under the UPA or the NDA, seems incapable of letting PSBs be run with professional autonomy.

The writer is a senior journalist

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