Timetable For Catastrophe

Privatisatising PSU Banks

E A S Sarma

In the Budget speech last year, Finance Minister Nirmala Sitharaman mentioned that the government would privatise a few Public Sector Undertaking (PSU) banks in due course. There are reports on statements originating from the Finance Ministry that the government would like to introduce a Bill during the current monsoon session of Parliament for enabling it to privatise PSU banks in principle and relax the cap on foreign equity holdings in them.

 The legal and other far reaching implications of privatising any PSU bank were never discussed in any government forum. The public is in the dark about it.

When private banks were nationalised in 1969, the then government had informed the Parliament that “the operations of the banking system should be informed by a larger social purpose, and should be subject to close public regulation”, it would serve the purpose of “severing the link between the major banks and the bigger industrial groups” which had so far controlled credit, “the interests of the depositors of the banks which have been nationalised, will not only continue to be fully safeguarded but will now have the backing of the State itself”.

Those considerations continue to exist even these days and have since become far more relevant, in view of the large sections of the disadvantaged households not being able to access affordable credit facilities even today, and in view of the fact that income inequalities and concentration of wealth have since increased, not decreased. As expected at the time of nationalisation, the PSU banks continue to play a vital role in promoting the welfare function of the State, as visualised in the Constitution.

From the point of view of the legal implications, one should remember that the PSU banks are entities set up under Article 19(6)(ii). Coming within the ambit of Article 12, they are deemed to be an arm of the State. As such, they are an instrument of the State in promoting the welfare role spelt out in the Directive Principles, especially Article 38(1) [“promote the welfare of the people”], Article 38(2) [“minimise the inequalities in income”], Article 39(b) [“the ownership and control of the material resources of the community are so distributed as best to subserve the common good”], Article 39(c) [“that the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment;”]. In addition, they are also subject to the provision relating to reservations for the SCs/STs/OBCs under Article 16.

 Privatising the PSU banks would run counter to the Constitutional obligation, amounting even to reneging on it.

The PSU banks employ around 8 lakhs of employees belonging to the SCs/STs/OBCs. A significant portion of them occupy managerial positions in those banks. Reservations in employment need to be viewed, not merely from the point of view of creation of employment opportunities alone but, more importantly, from the larger socio-economic benefit of empowering them. Privatisation of even a single PSU bank would not only create uncertainty regarding the conditions of service of the existing SC/ST/OBC employees (as also similar uncertainty in the future of all other employees) but also permanently close the Constitution-given opportunity for new recruitments to that extent. The government is under an obligation to explain these implications of this to the Parliament, as this will have long-term socio-economic implications. But the Modi dispensation has developed a habit of bypassing parliament on every crucial issue due to its brute majority in the House.

Households, especially from the low and the middle income groups, deposit their savings in the PSU banks, on the assumption that those banks are a part of the State and, therefore, their deposits would enjoy sovereign backing. In fact, as already indicated, that was the solemn assurance given to the Parliament by the government in 1969 when it nationalised the private banks. A unilateral decision on the part of the government now to privatise a PSU bank, without the consent of the depositors, would therefore constitute a breach of the trust reposed by the depositors in the bank and in the sovereign government backing it. Such a step may not be legally sustainable. But this government doesn’t bother about law. How government violates its own law just mocks at judiciary.

It may not be out of place to mention how the private promoters of the much touted Global Trust Bank had let down the bank’s unfortunate depositors and the RBI and the Finance Ministry had to direct a PSU bank in 2004 to rescue whatever had been left of that errant private bank. The Finance Ministry seems to wink at the poor track record of the private sector banking! Banks were nationalised because of the failure of private players. And now they are all set to denationalise the banks at the dictates of the corporate lobby.

When private banks were nationalised, the then government had consciously stated in the Parliament that the purpose of bank nationalisation was to “sever the link” between the banks and the industrial groups to whom they give credit. Privatising a PSU bank would amount to restoring such an egregious link which involves a clear conflict of interest. The way the government has so far gone about privatising the Central Public Sector Enterprises (CPSEs) points to the absence of any due diligence in the matter of selection of the bidders. Denationalisation means opening the path to loot public assets. And the government is precisely moving towards that direction.

Would the government assure the Parliament and the public at large that no private entity having either a direct or an indirect link with any potential client of the bank would be chosen to take over the management of the bank?

Several corporate business houses stand heavily indebted to the PSU banks. Many of them have been classified as NPAs, largely the outcome of outright fraud committed on the PSU banks, and the ongoing statutory resolution process has imposed heavy liabilities on them. They may now heave an audible sigh of relief.

Would the government filter out all such heavily indebted corporate groups from the bidding process? It is unlikely.

While introducing any Bill to privatise the PSU banks, the Finance Ministry should inform the Parliament of these legal, socio-economic and other implications, the implications of foreign equity holdings in the privatised banks, especially the adverse impact of privatisation on the spread of banking to the rural and the remote areas and to the disadvantaged sections.

Bank Unions including Officers’ Unions have been opposing the government’s idea of privatising PSU banks for long. They are likely to put up stiff resistance in the coming days. If some banks are sick today it is because bad debt is the root cause.

Courtesy: Big business Houses

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Vol 55, No. 4, Jul 24 - 30, 2022