Anniversaries of any momentous event inevitably entail celebrations. And if it is the golden jubilee of nationalization of 14 banks in 1969 by the Government “to promote rapid growth in agriculture, small industries and export, to encourage new entrepreneurs and to develop all backward areas”, an act that was then dubbed as “a mighty leap for the nation”, it certainly calls for more than a celebration: it prompts a deep reflection.
The first thing that strikes one’s mind when one reflects on bank nationalization is that it was an act emerging out of political considerations of a Prime Minister who, being frustrated by the growing influence of a group of leaders then popularly known as ‘syndicate’, was anxious to swipe them away to a corner and thereby gain control over the party. And no wonder if a former Governor of RBI described it as an act that happened “at the whim of a Prime Minister”. Later, in 1980, the government nationalized another six banks.
That being the style in which banks were nationalised no wonder if people, even half a century after continue debating whether nationalization was good or bad. Of course, the honest answer is: it is both. First, let us take a look at what good it did. After nationalization, the number of bank branches has gone up phenomenally: they have gone up from 8,262 as in 1969 to 141,756. Notably, the number of rural branches has gone up from 1,832 to 50,081, a neat rise of about 13%. The share of semi-urban branches has however gone down by about 13%, while there is no significant difference in the percentage share of urban and metropolitan branches between these two periods.
As a corollary to this, aggregate deposits have gone up from Rs 4,646 cr to about Rs 125 tn, while credit has gone up from Rs 3,599 cr to Rs 96.5 tn. The total assets of Public Sector Banks (PSBs) have indeed grown at an annual rate of 4% till 1990. Thereafter, bank credit grew by three times of the GDP growth till 2015. Credit disbursal for agriculture has substantially gone up, for it became mandatory for banks to compulsorily set aside 40 % of their net credit for agriculture, micro and small enterprises, education and ‘weaker’ sections. Further, government’s poverty elevation programs too were extensively supported by PSBs.
And here ends the good part and begins its unintended consequences that are haunting PSBs even today. The first victim of nationalization is: erosion in the efficiency of bank management. In its anxiety to give representation to various sections of the society in the boards of PSBs, the government appointed people from all walks of life to the boards. As a result, boards are often found ill-equipped to monitor the functioning of banks. Over it, owing to no competition, even a negative return on capital failed to alert the managements. Till economic reforms were launched in 1991, PSBs never acted as autonomous profit-seeking entities, and rather operated more as a part of government’s fiscal mechanism.
Coming to the specifics, prior to nationalization, banks were engaged in trade finance. But once nationalized, they, despite their poor credit assessment skills, started financing every activity: right from establishment of an industrial setup by a new entrepreneur to a cobbler seeking self-employment, all were lent funds, all under the guise of directed lending. And the result is: accumulation of bad debts. Over it, political patronage played havoc with credit portfolio of banks. The net result is: whopping stressed assets and demand for repeated infusion of new capital to keep banks viable. And today filed up bad debts are even causing acute liquidity crisis in the system.
With the declining profitability of private corporates after 2011-12, corporates found it pretty convenient to pass on their losses to PSBs. With result PSBs are today saddled with huge chunk of bad debts that are not only eating into their profits but also their owned capital. Reports indicate that Rs 4 trillion plus worth of bad debts were written off by PSBs during 2014-15 to 2017-18. Although bad debts were mounting up over the years, the regulator of the banking system appears to have remained as a mute spectator. Even the kind of frauds involving thousands of crores reported in the recent past from the system and the way even private-owned banks and shadow banks are of late defaulting, one wonders if the regulatory mechanism is robust enough to keep the system healthy and agile.
That said, even the government’s action to correct the situation, it must be admitted, is not matching the gravity of the crisis. Even the Insolvency and bankruptcy Code enacted in 2016 could not prove to be effective in recovering NPAs quickly. Even the vigilance mechanism of the government is proving to be a hurdle, for it was often found to dampen the spirit of honest officers in taking timely bold credit decisions to set right the credit portfolio.
Hence the question: What now? Or, what next? Of course, there are no easy answers. Some are clamouring for denationalisation of banks hoping that private management is the all cure for the present ills of the system. But looking at the performance of some of the much talked about private financial institutes in the recent past, a rationale man is not encouraged to think privatisation as the only right answer to the current problems of the banking system. Over it, if one analyses the performance private management as a whole vis-a-vis the kind of balance sheet management of many industrial establishments in the country, it fails to emerge as the only panacea.
Under such tiring circumstances, one way forward could be: to make PSBs fully autonomous by endowing them with professional management and making them accountable to the market system. This, of course, calls for political will. Now the question is: Does the government have gumption to stop politicians and bureaucrats from their habitual treating of PSBs as personal fiefdoms and nurture resilience and professionalism in banks that enables the owner to demand for financial accountability from their management? Simply put, government should keep itself away from their management by empowering boards to choose top management cadre and demand for performance, of course, by paying market-determined wages. Government should only be concerned about monitoring banks’ performance against the set goals. Else, the system may tumble down pulling down the real economy along with it.