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Issue 10

Banking on the Government

March 15th–16th, 2021 witnessed the congregation of 10 lakh bank employees in protest and solidarity against the much-debated privatisation of two public sector banks (PSBs). Banking services such as loan approvals, cheque processing and cash withdrawals were disrupted — estimates suggest that a total of 2.01 crore cheque instruments (valued at Rs 16500 crore) were left unprocessed in Mumbai, Delhi and Chennai. It was the United Forum of Bank Unions (UFBU) — an umbrella organization comprising 9 trade unions — that blew the war horn, calling for a strike against the decision announced by Finance Minister Nirmala Sitharam during the Union Budget as a part of the government’s disinvestment plan

Voicing concerns over employee welfare and job security that could potentially be threatened by the privatization of PSBs, the trade unions also exhibited apprehensions about the implications for the economy. They echo arguments from the classic dichotomy of public sector banks and commercial banks, suggesting that such a move would prove to be detrimental to the Indian financial landscape. 

Worries precipitated by this decision date much earlier than the announcement itself since India’s long march on the road of privatisation has been in the works for years. In the banking sector itself, IDBI bank was privatised in 2019 while 14 other banks were merged in the last 4 years, foreshadowing the possibilities of further privatization. While such asset reductions are a part of the government’s strategic sales, they also stem from a cause of concern over the efficiency of PSBs. 

While the public sector is not completely devoid of pressures to earn a profit, a certain level of efficiency is expected. The PSBs’ share of bad loans, as compared to that of commercial banks, raises eyebrows. Banks claim that they have been in the green — quoting a profit of Rs 1,74,000 crore. However, the bad loans valued at Rs 2,00,000 crore led to net losses. But are profits or NPAs the best measures of efficiency for PSBs? 

Given that the private sector operates with a profit motive, it is but natural to use profit and loss accounts to measure the success of a commercial bank. The rise in conversation about fiscal stability also factors in the significance of NPAs in estimating a bank’s financial health. However, the measures of efficacy cannot be the same for PSBs and private sector counterparts. The mandate and role of a public sector bank is simply too different from that of a commercial bank. 

Historically, PSBs have been entrusted with achieving financial inclusion, poverty reduction, increasing access to credit, and other social objectives, thereby acting as beacons of social banking. Ever since the nationalisation of the State Bank of India in 1955, PSBs have played a crucial role in acting as financial intermediaries, channelling savings (particularly from rural and suburban areas) into the economy. Doggedly pursuing social objectives, these banks have been strong drivers of the success of many welfare policies. For instance, PSBs were responsible for opening 16.5 crore Jan Dhan accounts as part of the Pradhan Mantri Jan Dhan Yojana. In contrast, private banks only opened 68 lakh accounts. 

With the poor financial infrastructure post-independence, PSBs have been essential to making banking and financial services accessible in the remote regions of the country. In many ways, it is this progress in financial inclusion that has been an engine of growth by bringing unproductive savings into circulation. Tapping into the closed vaults of rural savings, PSBs encouraged saving in banks that mobilised resources and money that was otherwise stagnant. An example of the contribution of PSBs to the financial architecture is the State Bank of India that achieved 100% inclusion by covering 31,729 villages during the financial year 2014. State-owned banks also contributed to fostering an entrepreneurial environment by extending credit facilities to vulnerable groups and weaker sections that may not have the necessary collateral to secure loans in private banks. 

Any bank’s greatest asset will always be Trust. Without the public’s faith in the brand and institution, a bank will never be able to garner savings and deposits. Previously, crises like the Yes Bank crisis of 2020 have raised questions on commercial banks’ ability to manage liquidity, inspiring a feeling of uncertainty in the public. With the notional commitment of the government to fiscal stability, public sector banks emerge as symbols of trust causing the general public to hold at least one account in a PSB. Hence, the role of a state-owned bank extends beyond its social obligations — it acts as a propagator and preserver of faith in the banking system for the masses. 

Public sector banks also possess strategic importance for the country — they support key industries with stressed assets such as aviation, mining, iron and steel etc. By supporting these industries, PSBs ensure that certain strategic sectors of the economy are protected and preserved due to the role they play in ensuring stability, employment or the smooth functioning of the economy. Hence, the loans extended to these sectors are greater in PSBs than in commercial banks, subsequently leading to greater NPAs as well. The bad loans from these key industries, coupled with the NPAs from extending loans to vulnerable social groups, explain sufficiently why PSBs suffer from a greater percentage of non-performing assets. Are NPAs still the strongest measure of efficiency between commercial and public sector banks? Probably not. 

Due to the very difference in the mandates and incentives of the private sector and public sector banks, it is folly to believe that a profit-driven, private sector bank can do what a PSB does. The strong tug of the profit-motive and responsibilities to shareholders impose a natural limit to the amount of social contribution a commercial bank can make to the economy; especially, given that many cases involve a direct trade-off between profits and pursuing social objectives. Hence, calls for privatisation of PSBs imply a simple trade between social responsibility/financial inclusion and profits, or what one might term ‘efficiency’. While the government can certainly get rid of a few bad apples in the basket by dumping poorly managed/underperforming PSBs, any economy like India should retain a certain proportion of public sector banks in the financial architecture to encourage equality, welfare, and fair access to financial services.

Whether the two banks being privatised are inefficient is a matter of economic analysis, but one must be careful with the metric being used. One can argue that the 2 banks being currently privatised still leave enough social bankers to strengthen the financial fabric of the economy, but we know which sides the trade unions will take. As we possibly head towards a more privatised, profit-driven India, the question remains — can we still bank on (read: with) the government to ensure the strength of our financial landscape? 

Advaita Singh is a second year economics student at Ashoka University and is the president of the Economics Society.