The Narendra Modi government’s decision to merge 10 public sector banks (PSBs) into four entities and introduce bank governance reforms is a big move. It may help streamline and improve PSBs, but it is not a liberalising move, for the government remains their owner and nothing has been done to reduce government state or role.
Finance Minister Nirmala Sitharaman announced the merger of Punjab National Bank with Oriental Bank of Commerce and United Bank, which makes it the country’s second-largest PSB. Canara Bank and Syndicate Bank become one; Union Bank of India, Andhra Bank and Corporation Bank will merge; and so will Indian bank and Allahabad Bank. The business they hold together will be about Rs 56 lakh crore.
Banks with scale, she claimed, will help build a $5-trillion economy. She listed out benefits of mergers: enhanced capacity to increase credit, strong national presence and global reach, increased risk appetite, NextGen technology for banking, wider offerings with augmented customisation, and better ability to raise resources from markets. Operational efficiency gains will reduce cost of lending, she added.
Governance reforms focus on making the management accountable to the board. A board committee will appraise the performance of executives of the level of general manager and above, including managing director. Boards have been given flexibility to introduce a CGM (chief general manager). There would be a chief risk officer, to be recruited from outside “at market-linked compensation to attract best available talent.” The risk management committee has been given mandate to fix accountability for compliance of the risk appetite framework.
The Finance Minister announced stipulations pertaining to succession planning and sufficient tenure. Boards of large PSBs will have flexibility to enhance sitting fees of non-official directors (NODs). NODs will perform a role analogous to independent directors. Boards have been given mandate to reduce and rationalise their committees.
Directors on the Management Committee of Board (MCB) will have a longer term “to enable them to contribute effectively.”
All these measures are good, but haven’t we been there, done that? Weren’t same and similar things said a zillion times in the past? Haven’t we heard fancy catchwords like public sector autonomy and transparency before? For instance, in August 2015, former finance minister Arun Jaitley had launched a seven-pronged plan, ‘Indradhanush’. The seven components pertained to appointments, a Banks Board of Bureau, capitalisation, de-stressing, empowerment, framework of accountability, and governance reforms.
But non-performing assets (NPAs) have not been brought under control. In March this year, NPAs were “only” Rs 7.9 lakh crore, Sitharaman said. At the same time, PSBs continue to be revenue guzzlers; in the last fiscal alone, the government had to spend over Rs 1 lakh crore by way of recapitalisation.
The Finance Ministry seems to have done everything to revive PSBs, except looking at the only cure — privatisation. In response to a query at a press conference, Sitharaman made it clear that privatisation was not on the agenda.
This is despite the fact that nothing other than privatisation can revive PSBs. The reason is simple: they are owned by the state. The theory is romance: the nation controls banks. The reality is not so romantic, for in practice the nation means politicians and bureaucrats, certainly not the most honest and efficient people in the country.
It is a well-known fact that non-business considerations are often taken into account. The consequences are cronyism, venality, unaccountability, ‘loanmelas’, evergreening, swelling bad debts, and so on. This has happened in the past; bank after government-run bank embellished its books, treated willful defaulters with kid gloves, allowed loans to be ever-greened, and often unquestioningly followed politicians’ orders. Hence the Nirav Modis and the Mehul Choksis.
This is the reason that experts, many of them within the system, have pointed out that privatisation is the only solution. In the wake of the Nirav Modi scandal, former chief economic adviser Arvind Subramanian had suggested increasing privatisation in the banking sector. Former RBI deputy governor Viral Acharya had also favoured denationalisation of some PSBs.
Just before Narendra Modi’s ascension in May 2014, an RBI committee under former Axis Bank chairman PJ Nayak had also expressed similar views. “If the government stake in these banks were to reduce to less than 50 per cent, together with certain other executive measures, all these external constraints would disappear,” the report said.
“This would be a beneficial trade-off for the government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully.” An RBI committee under M Narasimhan in 1998 had also recommended bank privatisation.
It is unfortunate that the decision makers in the government continue to ignore expert opinion and persist with public sector banking. The recent measures announced may provide a treatment for banking problems, but there is a critical difference between treatment and cure, and the real cure is privatisation.
(The author is a senior journalist. Views expressed are personal.)
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