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THE RISE AND FALL OF THE PUBLIC SECTOR BANKS IN INDIA

Rupankar Dey
July 26, 2020

Govt will continue with policy to merge PSBs, says Arun Jaitley ...

It’s been almost 51 years of nationalization of the Indian banking sector under the Congress government led by the then PM. Indira Gandhi through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 based on which 14 largest commercial banks were nationalized on the day of 19th July. Soon the ordinance was passed into a bill under the President’s approval on the 9th of August 1969. As per Reserve Bank of India’s special edition of a report, on currency and finance during the post Independence Era around 56% of the bank deposits lay within 81 scheduled, and 557 non- scheduled private banks before the public sector undertakings. Most of these banks were headed by big businessmen and industrialists who used to give credit more specifically to the urban and semi-urban populace and isolate those people working in the rural agricultural sector, as a result of which the total share of credit staged at around 2.2%. Beside that they unfairly cornered the banking finances and the deposits for their narrow, selfish ends, and rapidly expand the banking network to the remote regions, especially rural areas, and provide institutional credit to the farmers, small businesses and, other weaker sections of society, many of whom were caught in a remorseless trap of loan sharking, which sarcastically can be said “SOCIALISM” for the rich and much more exploitations of the poor, furthermore at that time India was afflicted from both economical and political aftermath of Indo- China War (1962) and Indo-Pak war (1965) along with two successive years of drought. As a result of which the economic graph was slowly turning down. This led the primary platform for the injunction of the government’s interference in this sector through this following bill.

The idea behind the bank nationalization was to break the nexus between the banks and immoral businessmen around the country, secondly to empower and ensure the upliftment of the economically weaker section of the society by providing smooth credit support to various unorganized sectors like agriculture, small and medium scale industries, etc by fixing special category quotas, and finally providing stability to the banking sector by preventing failures, which often used to happen previously as a result many people lost their lifelong savings. Slowly the bank nationalization led to the increase in no of branches in the rural areas from 17 to 36%. By 1990, total bank branches numbered 59,752, with over 58 percent share of rural branches (Quoted from the data given by The Hindu Business Line) and the share of agriculture in total credit consistently rose to 9% in 1975 from 2.2% and further 15.8% in 1989. Thus this move slowly paved the path for becoming one of the largest developing economies in the world, becoming self-sufficient in food grain production, and making significant pace in financial inclusion, and presently Jan Dhan Yojna has also played a significant role in this following process. Until date, 29.84 crore bank accounts have been opened under Jan Dhan Yojna with 38.35 crore beneficiaries (28.3% of the Indian population.) [The following data is quoted from an article of “Ideas for India” and the link of it is given below, after the end of this piece].

But slowly with state policies shifting towards liberalization and with the entry of private players post 1991era, the entry and dominance of PSB are on the decline, from 80% in 1997-98 to below 66% in 2017-18 as mentioned in a report by The Hindu business line, as a result of which there is a steady decline of public ownership but what was the major reason for this decline?’ The reason behind it was the default of high-risk loans from the PSB which became a norm for the last few years which set to a rise of new-age immoral, dishonest businessmen like Mallya, Choksi, Nirav Modi, etc, as a result of which common people cannot trust the sector, although being conceptually PSB is a good idea. Quoting a data mentioned by Mr. Sekhar Gupta in one of his episodes of cut the clutter almost 58% of Loans had been taken from the Public sector banks among which 95% are considered as Bad debt. This led to the shrinking of the gross value of the nationalized bank on contrary to the private ones for example presently Value of HDFC is 6 Lakh crore more than all the nationalized banks put together. (As mentioned by Mr. Gupta in the episode) These non-performing assets or bad loans eventually accounted for government coffer which primarily constituted by the tax-payers money. As once fairly predicted at that time by Minoo Masani an eminent opposition leader from the Swyatantra party, who in opposition of this bill had said in parliament at that time, “this will ultimately make a loss of the state enterprise” and the banks are not like small industries where temporary damages can be healed by large investments.

So how can the government remove all these brawls and make the PSB much more accountable, besides merging and equity infusion?

  1. Simply following Singapore’s PSB reforms, the government need to set independent board and management heading the PSB so that it could take bold decisions without any political or bureaucratic influence and getting free from the shackles of red-tapism, as also recommended by the former chairman of SBI Arundhati Bhattacharya in one of her interview with The Quint
  2. Immediate recovery of the bank’s non- performing assets by any means, giving more autonomy to PSB.
  3. The commercial banks have to be more selective and need to set more stringent conditionalities to deliver big loans.

 

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