Calcutta Notebook


The Modi government has thankfully and boldly abstained from interfering in the working of Public Sector Banks (PSBs). Bank officials are able to aggressively pursue the defaulters because there is no pressure from "Delhi" to go easy. Yet, the losses of the PSBs continue to mount. It is clear that good governance on the top is no solution for containing the losses of the PSBs. The problems of the PSBs are more fundamental.

The trigger for nationalisation of private banks in the seventies and establishment of the PSBs was that the private banks were not providing banking facilities in the rural areas; and loans to the farmers, small and medium industries (SMEs).This objective has been largely achieved. The number of bank branches in 1952 were 4061. This only doubled to 8262 in the next 17 years. In comparison, there was a steep expansion after nationalisation. The number of branches increased more than seven times to 59,752 in the next 20 years ending with 1990. The banking system was made accessible to larger numbers as was intended.

However, the losses of the PSBs increased in tandem. The PSBs suffered losses in running small rural branches where the deposits and loans were less. Thus, the PSBs started closing the rural branches as the pressure mounted on them to cut losses. This led to reversal of the momentum. The number of branches in the rural areas was 50 percent in 2010. These have declined to 37 percent in 2018. There is a saying in economics that "there is no such thing as a free lunch". The expansion in the rural areas has led to losses to the PSBs. Those losses have had to be borne by the same people for whom the expansion was made. The farmer got bank services but paid higher taxes to enable the Government to infuse capital in the PSBs to make up for those losses. In the result, the PSBs have started to reduce the number of such branches. The purpose of nationalisation of private banks and of establishing office: "The supervisor had failed to acknowledge and rectify government banks' inability to identify poor performing assets; and restructure and react quickly to improve recovery and cut losses. The regulator failed in gauging when extant assumptions were getting stretched and needed revision." The situation isĀ  back to square one. Private Banks were nationalised because the RBI did not push them to go to the rural areas and lend to the SMEs. Now one finds that fifty years after nationalisation, the RBI has again failed to regulate the PSBs. It is time now to privatise the PSBs and strengthen the RBI's function to push them in a socially desirable direction.

The decision of the Government to merge weak PSBs with relatively stranger PSBs falls flat in this background. If the so-called stronger banks have themselves wiped out all the capital invested in them by the Government in the 43 years from 1971 to 2014, pray, how will they conserve the capital invested in the weaker PSBs? Observers suggest that the only purpose of the mergers is to hide the continuous capital infusion in the PSBs from the public glare. At present the weaker PSBs are incurring losses and the Government is infusing capital into them to keep them afloat. This capital infusion shows up in the finances of the Government. It has to be shown in the budget. Now this infusion will take place within the balance sheets of the relatively stronger banks and the Government will not have to show this in the budget. It is like the head of the family directing the stronger son to carry the disabled son on his shoulders so that he does not have to do so himself.

The strike by the bank employees against merger is even more unfortunate. As said above, the main problem of the PSBs is the inefficiency and corruption. The employees have gone on strike to protect these unholy interests of theirs. If the authorities have to face their strike anyways, the Government should privatise the PSBs and face them on privatisation so that, at the end of the day, people at least see a solution to the sucking of the national wealth by the PSBS.

The Government has recently merged 10 Public Sector Banks (PSBs) into four larger PSBs in order to improve their efficiency. The Government has provided Rs 250k crore to these banks in the last 2-3 years in order to increase their capital. Yet, as of today the total market capitalisation of the PSBs is only 230k crore. This means that the PSBs have not been able to even retain the value of even the new capital that has been infused, let alone secure an increase the value of their earlier equity. In this situation, the Government must privatise all PSBs excepting State Bank of India, which has certain government roles such as managing the clearing houses.

No doubt the Government has achieved a huge success in controlling the fiscal deficit. The deficit has been brought down from 4.4 percent in 2013-14 to 3.4 percent in 2018-19. This step is to be welcomed. But there is a need to go farther. The reduction in capital expenditures of the Government has contributed three parts to the reduction of the fiscal deficit, while reduction in consumption expenditures has contributed only one part to that reduction. The salaries of Government employees have continued to increase. A substantial part of these salaries finds its way out of the country through the purchase of gold, making foreign investments, foreign tourism, or the consumption of foreign goods such as high-end mobile phones or modular kitchens.

Also, the Government has taken steps to ease the availability of finance to Medium, Small and Micro Industries (MSMEs). Steps have also been taken to simplify the filing of GST returns by them. The MSMEs are facing tough competition from goods imported from China. China allows its industries to pollute the environment. It also allows industrialists to hire and fire which has led to nearly double the productivity levels of Indian workers. Their industries are of large size and that too leads to lower cost of production. Chinese goods are cheaper for these reasons. It is necessary to increase the import duties on goods that are made by MSMEs in India such as toys, footballs and clothing. Then MSMEs will grow, they will employ more labour and demand will be generated in the market. ooo

[Formerly Professor of Economics at IIM Bengaluru]

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Vol. 52, No. 23, Dec 8 - 14, 2019