PSB Privatization: Will it Happen, When?

March 15,2018: The cacophony of demand for privatization of banks is rising from several quarters. The latest is the indirect pitch made by the RBI governor. His admission is that the rising non- performing assets (NPAs) being accumulated by the banking sector cannot be addressed by the existing RBI’s banking regulatory powers.

His veiled suggestion is to go for a drastic change in the structure. Many has read, rightly or wrongly, that he is hinting at privatization of nationalized banks, which are witnessing steady growth in NPAs over a period to time. More disturbing is his comment that the people at the helm of affairs at the nationalized banks often indulge in gold plating, a euphemism for cover-up of the real state of the banks.

Before the comments of the RBI governor, which many feel is a direct response to finance minister’s tongue in cheek comment that the regulator should be more vigilant in spotting the possible loans that can turn non performing , Nandan Nilekini, the main architect of UIDAI in one of his articles in a mainline English daily argued for privatization of the PSBs to ingrain accountability and to ensure efficiency in the banking sector.

According to Nilekini, performance of some private banks like HDFC is far better than the PSBs. The market capitalization of the HDFC is higher than that of 22 public sector banks put together.

Those who have been following the developments in the banking sector may agree that such knee-jerk reactions come only after detecting banking frauds or accumulation of NPAs. In the present context, these debates were kicked off in the aftermath of the PNB fraud, which, according to reports, had made close to Rs 15,000 crore or so non-performing.

It is a common knowledge that such things had happened before and are happening now. The privileged lots muster loans and default on payment and finally the loan turns out to be non-performing if the default in repayment spans over a fixed time.

The ire of the common man is that when they default on instalment of loan, the lenders would chase them mad till they cough up the money. There were instances when the property whether movable or immovable are attached without even giving proper notice.

The industry borrowers can take umbrage under the clause that distinguishes a borrower as a willful defaulter or the default is rendered by the exigencies of business (second category of borrowers are given a more relaxed treatment), no such provisions come to the rescue of an ordinary borrower. In the case of the latter, the law will take its own course.

It is nothing to suggest that the government should be more lenient towards the retail borrowers. But there is a lot of merit in suggesting that the law should be applicable equitably and in a fair manner. There are people who borrow money from the banking sources for financing their house or for the education of their children.

These days it is common that the borrower either loses the repayment capacity either due to loss of job or the housing complex under construction getting involved in dilatory litigation. If the banks can be lenient to the corporate borrowers who default due to genuine reasons, they can be equally accommodative of the genuine problems of the common man.

While the privatization lobby is getting support from a certain segment of the society, it is important to introspect why the government has come out with severe regulatory systems to control the banks. Liquidation and rampant corruption in private banks were rampant some decades back.

There are several banks which were liquidated and the depositors lost their valuable resources and later refunded the deposits in instalments including the case of Pala Central Bank, which was liquidated. Several sick banks were merged with nationalized banks so that it became easy for the government to infuse capital.

One has to introspect as to how in the recent days NPAs have mounted. Two important industry segment –telecom and coal, largely contributed to that. The swift policy changes, the intervention of judiciary etc. have contributed to make such loans stressed. Rather, they were policy-driven rather than endogenous to the working of the banks.

That does not mean that the government should take a hands-off approach to the current crisis. What is important is to take a corrective step after consulting all stakeholders including the customers of the banks, who are always at the receiving end.