In two years we will be celebrating or bemoaning, depending on our ideological world view, the 50th anniversary of the nationalisation of major banks in 1969. Indira Gandhi wanted banks to lend more money to farmers to meet the then urgent national need for increasing food production. The banks were mandated to set up thousands of rural branches. When she came back to power in 1980, she imposed Integrated Rural Development Programme (IRDP) targets on PSBs to give loans to government identified beneficiaries. Thus, the half-circle of state control over banking was completed in about 25 years.
By 1989, the other half-circle began when the first national agricultural and rural debt waiver was announced. Then in 1992, public sector banks (PSBs) were asked to focus on commercial goals and minimising NPAs. New private banks were allowed to come up, all under the Congress. The circle was three quarters completed. Now, the Modi government wants to consolidate the PSBs into a few, ostensibly to make them stronger and more competitive. The bank employee unions are striking against this step, as they apprehend PSBs will be privatised, completing the circle.
The Cabinet decision on August 23 says the banks will be asked to come up with merger proposals, and it is obvious that each of the top five or six PSBs will cherry pick among the other less healthy, but not sick, PSBs to find the best partner to merge. That may yield five or six larger, but not healthier, PSBs as the advantages of merger will set in after several years as it takes time to cut redundant branches, redeploy staff and harmonise technology and procedures. That will leave behind the five unhealthiest banks—with gross NPAs between 24.1 per cent for IDBI, Indian Overseas, United Commercial, Bank of Maharashtra and the Central Bank at18.2 per cent. What would be done with them? Is there any reason to think that merging two or more of these weak institutions will produce a stronger one?
The real reason for the high NPAs in PSBs (average now exceeding 10 per cent) is ironically, government ownership, which leads to interference in all matters from the appointment of board members, chairmen, CEOs and EDs to fixing remuneration levels and not linking pay or promotion substantially with performance. While government pressure for giving loans to sectors important for economic growth (infrastructure, power, steel, telecom and exports) and development (agriculture, small enterprises and the weaker sections) may be “valid”, it also leads to pressure for giving loans to politically well-connected parties. To say that this reality will change merely because PSBs are merged into five or six is to not confront the basic reason for the malaise. Reducing government interference in PSBs is the key, not mergers.
Is the answer then to completely privatise the PSBs? Not at this stage of our economic development, where we are still not a middle income nation in per capita terms. Part of the reasons for nationalisation (e.g. directing credit to priority sectors) are still valid but interference in governance and management is not. After merger, PSBs should be brought under a holding company and all government directives must go to the board of that and stop there. The PSB HoldCo should have a professional and upright board and it should in turn appoint two directors in each PSB. As all the merged PSBs will be listed, three independent board members must be elected by non-government shareholders. The bank boards should thereafter run each PSB more professionally. As for PSB employees, they should see the writing on the wall—if their bank goes sick, there will be no jobs anyway.
Vijay Mahajan was a member of the Regional Rural Banks Restructuring Committee in 2001-02 and the Raghuram Rajan Committee on Financial Sector Reforms, 2008-09.
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