The privatisation of public sector banks has been an issue of debate for a long time. Economic experts are again talking about privatisation of public sector banks (PSBs) due to current non-performing assets (NPAs) crisis. The ever-increasing size of NPAs in public sector banks has finally forced RBI as well as the Indian government to take some bold steps before the situation becomes worse. RBI changed its stance on the identification process of NPAs in Dec 2015 and asked banks to recognise bad loans including restructured debts as NPAs. But this process of forcing banks to recognise their NPAs should have been done much earlier to prevent the accumulation of NPAs in the banking system. Earlier this year, in February, RBI again issued a circular to resolve loans bigger than Rs. 2000 crore in 180 days after first default or else file insolvency application under Insolvency and Bankruptcy Code (IBC) 2016. This has led to a dramatic increase in the total amount of NPAs, leaving PSBs’ balance sheet in worrisome state (gross non-performing assets ratio ‒bad loans as a percentage of total loans ‒ of all scheduled commercial banks rose from 4% (Rs. 2,40,971 crore) in March 2014 to 11.6% (Rs. 10,35,528 crore) in March 2018).
After failing to address the problem of rising NPAs with the help of numerous policies, now the government is pushing for ownership neutrality in Indian financial system without having any clear vision. The basic characteristic of an ownership neutral structure is that all players should be on the same level playing field, none having special privileges and should be regulated with the same governance standards. RBI governor Dr Urjit Patel in his speech at Gujarat National Law University said that Banking Regulation Act should be amended to make it ownership neutral which would provide regulatory authority equal powers over all banks and promote the pro-competition environment. The idea of ownership neutrality has its roots in various reports of IMF, World Bank, Financial Stability Board (FSB), Financial Sector Legislative Reforms Committee (FSLRC) and Committee on Digital Payments.
To implement ownership neutrality, FSLRC recommended corporatisation of all banks by transferring them under Companies Act, 1956 and establish a Resolution Corporation (RC), which will have equal regulatory powers over all financial service providers including all scheduled commercial banks. World Bank and IMF in their 2017 Financial Stability Assessment Programme of India (FSAP) pointed out that RBI’s regulatory powers over banks are not neutral to bank ownership. It reported that RBI’s legal powers to regulate and supervise PSBs are limited as it cannot remove PSB management who are appointed by the government and cannot hold PSBs management accountable for their strategic decisions. All the above-mentioned recommendations got manifested in the form of FRDI Bill.
FRDI Bill introduced in Lok Sabha on 10th August, 2017 by the current government, implicitly includes the concept of ownership neutrality as it proposed replacement or large scale amendments of all legislations―Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and State Bank of India Act, 1955 ―which give special privileges to public sector banks. The bill was opposed vehemently by all sections of the society due to its controversial provisions, especially the bail-in clause. While trying to enforce ownership neutrality in the banking sector, the government is ignoring the fact that public and private sector banks have different operational objectives. PSBs were nationalised with the aim of broadening their reach to all citizens and to facilitate welfare schemes of the government. Also, their primary target is the rural population unlike private banks majorly located in metropolitan cities, targeting urban population. Prasenjit Bose also wrote in his article that an approach that seeks to attain “neutrality” in ownership and competition of banking sector is fundamentally flawed.
The concept of “Ownership Neutrality” is not an out of box idea which has emerged now. According to experts and reports of the government, ownership neutrality needs transferring of public sector banks under Companies Act, 1956; to bring them on a level playing field with private banks. But what we are forgetting here is that PSBs function with the motive of social banking whereas private banks operate with the aim of profit maximisation. Instead of addressing the root cause of the problem ‒ issuance of credits without assessing the viability of projects ‒ the government is transferring the blame for high NPAs to PSBs and then using it to implement ownership neutrality. Also, there is no study which shows that corporatisation of PSBs will solve the banking crisis until and unless banks start issuing credits to big industrial houses with due diligence, as about 50% of total non-performing assets belong to top 100 defaulters (Gross NPAs as of March 2018- Rs. 10,35,528 crore, amount of gross NPAs of top 100 NPAs- Rs. 4,98,790 crore). Therefore, the idea of the same regulation for both public and private banks, in the name of ownership neutrality should be questioned as it advocates privatisation of public sector banks.