Govt begins bank privatization but it’s a Herculean endeavor

Liberalization began almost three decades ago; yet, it has almost bypassed the two important sectors—agriculture and banking. The Narendra Modi regime decided to open up the farm sector by offering selling choices to farmers; it recently promulgated a couple of ordinances to the effect. There are reports in the media that the government is also trying to privatize or denationalize certain public sector banks (PSBs). One hopes that happens.

The absence of privatization or denationalization has cost the taxpayer and the economy dear. Lakhs of crores have been spent on the recapitalization of PSBs—to little avail. For they always need more money. Currently, PSBs need recapitalization worth anything between Rs 1.25 lakh crore and Rs 4 lakh crore.

“The government is looking to privatize more than half of the state-owned banks to reduce the number of state-owned lenders to just five as part of an overhaul of the banking industry,” Reuters reported on July 20, quoting government and banking sources. In the first phase, the government would offload majority stakes in Bank of India, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra, and Punjab & Sind Bank.

“The idea is to have four-five government-owned banks,” a senior government official was quoted as saying. It is a bad idea, for state-controlled banking has been the bane of the economy for decades. It is unfortunate that the government, while privatizing some PSBs which is good, still persists with a bad idea.

For privatization is the only way to cure banking. In August 2015, the then finance minister Arun Jaitley had launched a seven-pronged plan, Indradhanush. The seven components pertained to appointments, a Banks Board of Bureau, capitalization, de-stressing, empowerment, framework of accountability, and governance reforms.

In the last quarter of 2019-20, non-performing assets (NPAs) of most PSBs fell. Yet, despite all talk about PSB reforms and a series of recapitalization, gross NPAs of PSBs were in the region of 5.5 lakh crore, over twice that of the NPAs of the 19 private banks put together, which were a little more than Rs 2 lakh crore.

Sadly, governments since 1991 have done everything to revive PSBs, except looking at the only cure—privatization.

The disease began in 1969, when the then prime minister Indira Gandhi, in a crass and dangerous political move, nationalized a number of banks. The rationale offered was romance: the nation would control banks. The reality didn’t prove romantic, though, for in practice the nation means politicians and bureaucrats, certainly not the most honest and efficient people in the country.

It is a well-known fact that non-business considerations are often taken into account. The consequences are cronyism, venality, unaccountability, ‘loan melas’, evergreening, swelling bad debts, and so on. This has happened in the past; bank after government-run bank embellished its books, treated willful defaulters with kid gloves, allowed loans to be evergreened, and often unquestioningly followed politicians’ orders. Hence the Nirav Modis and the Mehul Choksis.

Currently, there are a dozen PSBs. The government official Reuters spoke to said that a privatization proposal would be put before the cabinet for approval.

It needs to be mentioned here that privatization announcements are made regularly but the plans often fail to materialize. For example, the government tried to sell Air India in March 2018, but the terms and conditions were so tough, indeed unrealistic, that it never took off; not a single bidder formally expressed interest to buy the ailing airline. Another attempt to sell the national carrier was made early this year—again without concrete results.

Therefore, we have to keep our fingers crossed and hope that the government succeeds in privatizing some PSBs.

<span lang="EN-US">Picture courtesy: Wikipedia.org</span>.