In the USA right now, roadshows by our government to sell IDBI Bank are happening, soliciting prospective buyers. Meanwhile, the bill that will remove legal hurdles in selling the PSU Banks is expected in the coming monsoon session of the parliament. Soon the cap on foreign equity holdings in banks will be gone and the sale of banks will commence.
When private banks were nationalised in 1969, the government informed the Parliament that “The money which depositors entrust to the banks are in the nature of a sacred trust.” And “The operations of the banking system should be informed by a larger social purpose, and should be subject to close public regulation”, it would serve the purpose of “severing the link between the major banks and the bigger industrial groups” which had so far controlled credit, “the interests of the depositors of the banks which have been nationalised, will not only continue to be fully safeguarded but will now have the backing of the State itself.”
Those considerations are now far more relevant since large sections of disadvantaged households are not able to access affordable credit facilities even today. And the income inequalities and concentration of wealth have since increased, not decreased. With no access to credit, people use loan apps with dubious methods that charge exorbitant interest rates, leading many to suicide.
As expected at the time of nationalisation, the PSU banks continue to play a vital role in promoting the welfare function of the State, as visualised in the Constitution. From the point of view of the legal implications, one should remember that the PSU banks are entities set up under Article 19(6)(ii). Coming within the ambit of Article 12, they are deemed to be an arm of the State. As such, they are an instrument of the State in promoting the welfare role spelt out in the Directive Principles, especially Article 38 (1) “promote the welfare of the people,” Article 38 (2) “minimise the inequalities in income,” Article 39 (b) “the ownership and control of the material resources of the community are so distributed as best to subserve the common good,” Article 39 (c) “that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.” In addition, they are also subject to the provision relating to reservations for the SCs/STs/OBCs under Article 16.
Respect the Constitution!
The move to privatise public sector banks would run counter to this constitutional obligation and even amount to reneging on it. The PSU banks employ around 8.26 lakhs of personnel including those belonging to the SCs/STs/OBCs/EWSs and implement reservation policy strictly. A significant portion of them occupies managerial positions. Reservations in employment need to be viewed, not as a creation of employment opportunities alone but, more importantly, from the larger socio-economic benefit of empowering and uplifting them. Privatisation of even a single PSU bank would not only create uncertainty regarding the conditions of service of the existing SC/ST/OBC employees (as also similar uncertainty in the future of all other employees) but also permanently close the Constitution-given opportunity for new recruitments to that extent.
Households, especially from the low and middle-income groups, deposit their savings in the PSU banks, on the assumption that those banks are a part of the State and, therefore, their deposits would enjoy sovereign backing. In fact, as already indicated, that was the solemn assurance given to the Parliament by the government in 1969 when it nationalised the private banks. A unilateral decision on the part of the government now to privatise a PSU bank, without the consent of the depositors, would therefore constitute a breach of the trust reposed by the depositors in the bank and in the sovereign government backing it. Such a step may not be legally sustainable.
Old wine and a new bottle!
It is worth recalling the way the private promoters of the much-touted Global Trust Bank had let down the bank’s unfortunate depositors. The RBI and the Ministry had to direct a PSU bank in 2004 to rescue whatever had been left of that errant private bank. The recent Yes Bank fiasco is another example where another PSU bank had to save a failing, mismanaged private bank.
When private banks were nationalised, the then government had consciously stated in the Parliament, as indicated above, that the purpose of bank nationalisation was to “sever the link”; between the banks and the industrial groups to whom they give credit. Privatising a PSU bank would amount to restoring such an egregious link which involves a clear conflict of interest. The way the government has so far gone about privatising the CPSEs points to the absence of any due diligence.
Several corporate business houses stand heavily indebted to the PSU banks. Many of them have been classified as NPAs, largely the outcome of outright fraud committed on the PSU banks, and the ongoing statutory resolution process has imposed heavy liabilities on them. Even now, the names of defaulters whose huge loans have been written off are not made public.
The stellar performance of PSU banks
As per the GOI presentation, the operating profit of 12 PSU banks, excluding IDBI and Regional Rural Banks in March 2022 is Rs.2,08,591 crore and the net profit is Rs.66,541 crore. It has doubled in a year. These banks pay huge dividends and taxes to the government. Their market share in deposits is 62% and in advances, it is 58%. Their NPA provisions are 0.9% at par with private banks, despite the PSU banks also discharging several welfare functions enjoined upon them by the Directive Principles. What is needed is an increase in the number of branches, and staff, and an improvement in the Credit Deposit Ratio.
LIC had bought 51% shares of IDBI at the cost of Rs.61 per share and turned around the failing bank. Now the bank is to be sold off. But the government cannot discriminate. Selling IDBI Bank to foreign investors through road shows is against the declared policy of self-reliance. Laws should be amended if needed to allow LIC to own the bank and not to privatise the public banks. Finance pundits should also learn lessons from the disaster it has created through the 3.5% IPO of LIC.
Reign of the Shylocks
More than 80 crore customers who have accounts in Public Sector Banks will be affected directly if privatisation takes place. The minimum charges will go up, and access to small credits will diminish, the loans and services will become very costly, and the 43 crores Jhan Dhan Account holders will be thrown out of the banking system. For the employees, their own survival in the banks will be difficult, as we have seen in the recent VRS offer of Air India and the earlier experiences of privatisation.
For the youth, employment in the banking sector will be scarce without job security and most importantly, there will be no reservation including the 7.5% for the economically weaker sector among the forward caste. The majority of the weaker section, the middle class including the upper middle class, will have to depend on credit sharks–the non-banking financial companies, microfinance institutions, co-lenders and loan apps. They will extract their flesh and blood like Shylock.
Thomas Franco is the former General Secretary of All India Bank Officers’ Confederation and a Steering Committee Member at the Global Labour University.
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