In the aftermath of the Rs. 12,000 crore fraud perpetrated by Nirav Modi, the critics of the Indian Banking system has launched into a fresh debate on the ownership structure of India’s Public Sector banks. People like former Arvind Panagariya, NITI Aayog Vice-Chairman, Viral Acharya, Deputy Governor of RBI, and Urjit Patel, Governor of RBI has openly shown their apathy towards the country’s banking system. Some sections of the media even have started advocating for de-nationalisation, as if reducing the government’s stake in public sector banks and thereby privatising them would be the panacea of all problems being faced by the banking sector currently. Evidently, non performing assets (NPAs) have become the burning issue today. However, one question that is seldom asked is who is responsible for the creation of NPAs?
In India, 72 percent share of all assets created, is by the public sector banks. Despite that, India remained relatively unaffected by the global economic crisis of 2008. This could be possible because of the conservative lending practices followed by the public sector banks.
In the post-crisis years, Indian companies went on a debt-ridden expansion spree. Many private sector players borrowed heavily to invest in the power, steel, and infrastructure sectors. A report from 2015 says that the top 10 companies in terms of indebtedness were:
|Sl||Name||Indebtedness (in Rs.)|
|1||Reliance Group||1.25 lakh crores|
|2||Vedanta Group||1.03 lakh crores|
|3||Essar Group||1.01 lakh crores|
|4||Adani Group||96031 crores|
|5||Jaypee Group||75163 crores|
|6||JSW Group||58171 crores|
|7||GMR Group||47976 crores|
|8||Lanco Group||47102 crores|
|9||Videocon Group||45405 crores|
|10||GVK Group||33933 crores|
In 2017, RBI has reported that just 12 companies are estimated to account for 25 percent of the total NPA in the banking sector. Among them are the Essar Steel, Lanco Infratech, Bhushan Steel, Jaypee group and many others. Most of these NPAs were caused because in 2013 the commodities market fell along with the global demand for power and steel. With the infrastructure sector failing to take off as expected, the companies could not service their debts and became NPAs. Interestingly, all the 12 companies named by RBI and currently being processed by National Company Law Tribunal are in the private sector.
During the same period, the public sector companies in the same sectors like NTPC, Coal India, NMDC, Nalco or NBCC, emerged with stronger balance sheets thereby proving that the futility of debate over ownership status of Indian companies including public sector banks.
Indian banking system has a chequered history. Between 1935 and 1947, nearly 900 banks failed followed by 665 banks in the period from 1947 to nationalisation in 1969. So much so, that in 1950 an elderly citizen from West Bengal wrote to prime minister Jawaharlal Nehru complaining that small depositors who lost their deposits in these banks “scheduled and affiliated [sic] by the Reserve Bank” had come to the conclusion that the central bank was “only meant for the Big Pandas who … only know how to squeeze” the poor and who were “sleeping with oil in their noses” (RBI History 1951-67).
Herein it will be worthwhile to remember the Global Trust Bank (GTB) which was licensed and began operations in 1994. GTB was involved in the stock market scam of 2001, that the stockbroker Ketan Parekh ran. GTB lent heavily to individuals speculating in the stock market; when the market crashed the bank suffered extensive losses. One consequence was that merger talks with UTI Bank fell through. The Reserve Bank of India (RBI) forced Gelli to resign. Gelli’s successor also quitted after six months, and Gelli’s son joined the board of directors. In 2004, Gelli briefly returned to the bank in February 2004 before being again forced to resign. RBI examined GTB’s accounts for 2001-2 and found that GTB’s net worth had turned negative, but did not close the bank. GTB did not address its problems. Instead, and despite its dire straits, GTB continued to grow. It had 87 branches in 2002-2003 and grew to 103 branches before the RBI forced it to close. Oriental Bank of Commerce acquired GTB on 14 August 2004. Shareholders in GTB received nothing for their shares; depositors, however, suffered no loss.
Recently, while talking to the media, the former Governor of Reserve Bank of India Y.V Reddy said that the privatisation of the banking sector is not healthy for a developing economy. Privatisation would lead to concentration of credit in the hands of the corporates. The R.K. Hazari committee report (1967) stated that to undertake proper credit planning in the country, it is necessary to snap the links between the banks and big business houses. Both the Vivian Bose Commission (1956) and the Mahalanobis Committee on Distribution of National Income in India (1960) exposed the nexus that existed wherein directors of banks used their position to finance the companies in which they had interests.
The anti-small borrower biases of banks were evident, and the banks generally ignored the farmers, women, students, small industrialists in respect of credit. Against this backdrop, 14 banks were nationalised in 1969, with a larger social purpose to sub-serve national priorities like rapid growth in agriculture, small industries and export, employment generation, and development of backward areas.
The privatisation of Indian PSBs cannot help in rectifying the current economic turmoil in the country. Moreover, there is no proof that private sector banks have been able to avert frauds entirely. The government must immediately implement the Parliamentary Standing Committee on Finance’s recommendations on the stressed asset management (2016). The steps that can be taken to resolve the crisis include changing the NPA recognition norms and revival of the Development Financial Institutions in India. Conversion of IDBI, ICICI, IDFC into all-purpose banks was a historical blunder, because of which banks are required to engage in the financing of long-term projects thereby causing an asset-liability mismatch. The idea of Development Financial Institutions for investing in long-term projects is accepted worldwide. For example, in Germany: KFW, the government-owned development bank, is crucial in developing national infrastructure as well as the renewable energy revolution.
In today’s world scenario when countries like Great Britain are mulling over the idea of nationalising its banks, the debate over ownership structures in Indian banks is rendered useless.
All India Bank Officers Confederation (AIBOC) has launched the ‘Save Public Sector Campaign’ with the singular aim to educate the customers and the general public so that the ‘Nationalised’ character of the public sector banks may be kept intact. In a recent press release, AIBOC has provided a detailed note on the steps that can be taken to combat the NPA menace. Indian policymakers should invite all stakeholders including the employee organisations and trade unions in the banking sector to discuss these issues, instead of trying to push ‘privatisation agenda’ through the back door.