YES, public sector banks aren’t bad at all

Were it not for its appalling contextual irony, some of the stark conclusions put out in the Economic Survey 2019-20, tabled in Parliament before the Budget, could have been ignored as fallacies of inference which economists can commit.

In a strong indictment of the entire public sector banking system in the country, the Survey begins its chapter on the golden jubilee of nationalisation by postulating that “on every performance parameter, the PSBs are inefficient compared to their peer groups”.

This statement is prefaced by the sentence, “As PSBs account for 70 per cent of the market share in Indian banking, the onus of supporting the Indian economy and fostering its economic development falls on them”. The first question that arises is: Could India have achieved whatever it has on the economic front without the PSBs playing a key role? But wait a while for us to examine that.

Barely a month has passed after the damning of the PSBs vis-a-vis the new private banks — NPBs to use the CEA’s favourite term. And a “star” NPB is under a moratorium. Was the Survey so short-sighted that it failed to factor in this impending implosion which everyone in the market knew about?

This is not the time for exultations over casuistry. The Government under the tenacious Finance Minister and the sober-like-a-judge RBI Governor have done well in restoring public confidence in the financial system.

Public sector banks have time and again provided support to crisis-ridden NPBs, in the form of investment, advice and the supply of talent. Even the administrator in charge of YES Bank is a seasoned SBI Deputy Managing Director, not an NPB veteran.

But let’s return to the Survey and its pronouncements. Dwelling further on what ails the PSBs, it uses two indicators — the Return on Assets (RoA) and the Return on Equity (RoE) — to compare PSBs and NPBs. It states: “It is clear that for every year since 2013 the RoA of the best performing PSB has been lower than the RoA of the worst performing NPB. A similar, albeit less stark, pattern is observed for the RoE as well.”

YES Bank imbroglio

In the absence of a disclaimer that YES Bank, the fourth largest NPB was excluded for the comparison by the CEA, I would assume that it was included for the data. Lest we forget, YES Bank had declared a net profit of ₹1,700 crore at the end of March 2019 (with a good RoA and RoE) and a capital adequacy ratio of over 16 per cent — higher than even SBI’s!

The YES Bank imbroglio in the context of the Economic Survey’s chapter on banking brings back to mind the British queen’s query soon after the global crisis of 2008. At the London School of Economics, Queen Elizabeth who supposedly lost about $25 million in the crisis, asked economists as to “why nobody saw this coming?”. Purely from an academic perspective, it is time to ask similar questions here. Are the NPBs as efficient as they are touted to be? Are their governance practices better? Are PSBs so inefficient? Or are they just the favourite whipping boys?

The governance and conduct of the CEOs of two similarly hyped NPBs are still fresh in public memory. One CEO who faces criminal charges now, unfortunately was a Padma Bhushan awardee. So it is time we recognised that all the dazzling NPBs are not diamonds. There’s a basic flaw in the thinking of the neo-liberal economists. They ignore one of the main intangibles in the world of banking. Trust. The trust that the customers and the public have in public sector banks should never be undermined. More than actual capital, it is this one word which sustains our system. That trust comes out of ownership by the sovereign.

Withstood competition

Here, a comparison with two other sectors in the post 1991-reform period will be in order. When the licences for NPBs were liberalised there was apprehension whether PSBs like SBI will be able to withstand competition. The same worries permeated sectors like telecom and aviation. Unlike the other two sectors, a few banks like SBI have not only withstood the competition but in some areas, even bettered their records. It is apposite now to come to the relevant question of “supporting the economy and fostering development” which is the onus of the PSBs as the Survey states. That they lent heavily for infrastructure development is known. All the major roads, airports and power plants would not have come up but for PSBs. The NPBs played it safe. That the PSBs suffered on account of NPAs in these sectors is a fact. But no economist has measured the development benefits that the loans engendered.

Just one example. The Indore-Ujjain highway is one of the best roads we have. Loans to the road developer became an NPA and were recovered under an OTS (one-time settlement). But the highway is a national asset and eases the way for crores of pilgrims, including during the Ujjain Kumbh Mela of 2016. No NPB funded this asset.

Two more recent “national development” statistics will suffice. Out of about 31 crores of PMJDY accounts opened — Prime Minister Modi’s historic move — the PSBs did 95 per cent.

The Deendayal Antyodaya Yojana, named after one of the pioneering “Poor Economics” thinkers of the political Right, Pandit Deendayal Upadhyaya, gives loans to the unfunded. These loans are silently transforming millions of poor across the country, mainly women. The NPAs in this segment are less than 3 per cent. (The poor indeed pay back.)

Who are the lenders? More than 90 per cent of the loans by value are by the much-maligned PSBs. One NPB does not even lend under the National Rural Livelihoods Mission, according to GoI sources. Is this to say that all is well with PSBs? That they have to reform constantly and improve vastly their customer service are beyond doubt. It needs to be told that even as the seasoned SBI Chairman grapples with the macros of banking, his gaze is unflinchingly on how the small man/woman at his remotest branch is treated. But with warts and all, the PSBs deserve a better deal by analysts and advisors. The Booth School-oriented analyses may lead to wrong conclusions which will demoralise PSBs. The YV Reddy school may help better!

The writer is a top public sector bank executive. Views are personal.