Road Ahead for Public Sector Banks (9 August 2020)
Road Ahead for Public Sector Banks (9 August 2020)
Why in News:
Of-late there is a lot of buzz about the privatization of public sector banks. There have been several reports in the media about the future of central banks. Social media too is abuzz with several forwards doing the rounds asking people to be careful of their deposits. Such fears are mostly unfounded.
Though there have been reports about the possible privatization of banks in India, there have been no concrete announcements, apart from an indication from finance minister Nirmala Sitharaman in May. In a privatization scenario, the government will always retain a portion of the bank’s stake and as such will remain a shareholder. Whenever bulk withdrawal of deposits takes place, the government as a shareholder will step in to adequately capitalize the bank. Meanwhile, a RBI board member has said Public sector banks should not be privatized given the country's developmental needs but the government can look at reducing its shareholding to 26 percent by selling a larger portion of its stake.
The government had in August last year announced that the Oriental Bank of Commerce and the United Bank will be merged into Punjab National Bank (PNB) to create the country’s largest state-run bank after SBI, with a total business of close to Rs 18 lakh crore. Similarly, Syndicate Bank is to be amalgamated with Canara Bank, and Andhra Bank and Corporation Bank will be merged into Union Bank. Also, Allahabad Bank will be amalgamated with Indian Bank. The consolidation exercise was aimed at creating only a few (6-7) but strong banks to support the rising credit appetite of the economy, help reverse a slide in economic growth and cut costs through greater synergy. Each of the amalgamated entity, created in April, has a business of over Rs 8 lakh crore.
The Cabinet in March approved the proposed amalgamation of 10 public-sector banks to create four larger lenders and the exercise came into effect from April 1.
Summary of the Debate
Fear factor of public:
- Recent amendments is now protecting five lakhs rupees of the account holder, so that is the only insurance cover that is available as on date, so even if you have fixed deposits of more than five lakhs of rupees or saving account more than that. Then in case of the dire liquidity of the banks, the only ensured amount will be the upper cap of 5 lakhs of rupees that is how it stands legally today.
- The Punjab and Maharashtra Co-operative (PMC) Bank crisis happened and sudden lockdown and people allowed to withdraw only a very tiny limited amount for a extended time have created a fear factor among the depositors.
- Post covid suddenly the small investments in share market is going up, that also shows that people are wondering about their portfolios about where to park their money.
- Recently within months of small cooperative bank fallout in India, major private player Yes Bank (India's fifth largest private sector bank) has also come under the RBI action for mounting bad loans. The Reserve Bank of India placed Yes Bank under moratorium. Yes Bank customers cannot make regular withdrawals of more than Rs. 50,000 a day till April 3, 2020 subject to a maximum of Rs. 5 lakh.
Challenges with PSUs:
- Many PSUs are underperforming.
- Despite the introduction of several mechanisms by the government and the RBI there is little improvement in the functioning of PSU banks.
- Private sector investment is getting delayed due to slow credit growth.
- The majority of the non-performing assets lies in the public sector banks.
- PSBs are dually controlled by RBI (under the RBI Act, 1934) and Finance Ministry (under the Banking Regulation Act, 1949) and RBI does not have all the powers over PSBs that it has over private sector Banks.
- There is a lack of Autonomy in Public sector bank boards as the government still decides board appointments (as the Bank Bureau board is not fully functional).
Yes Bank Crisis
PMC Bank Crisis
- The solution is this 5 lakh of rupees need to be constantly enhanced further, there has to be a secured guarantee. There could be a small insurance premium of less than 10 rupees because looking at the amount of bank deposits the premium will come out very small. So, that kind of a policy is a must for people to come out of this clear factor, so that they know their money in whatever form it is safe and they can tap it whenever needed.
- The people need full insurance for all deposits in all banks whether it is public sector or private sector.
- If depositor has to pay an insurance premium the option should be given, it should be mandatory that he pay that premium and if he has a deposit over a crore and he should not be ensured then the bank should not accept a deposit above that amount.
- The supervisory role of the RBI has to be more inclusive and more effective.
- Bring in place a development financial institution as soon as possible and take out all these infrastructure and those kind of loans where the banks can legitimately claim.
- Any sectors perform best when sectors are allowed to work on commercial a principle that is what the government is moving towards.
- The main problem is of credit problem and deposit problem; the credit problem is an entirely different one to be handled by ensuring that there is connectivity between who gives the loan and under what circumstances.
- The interest of depositors is the totally different thing the government of India allows for a universal insurance cover for every bank deposits up to Rs 5 lakhs for each depositors. So it might be needed to take it forward.
- The reason why Yes bank is a success in terms of the recapitalization and PMC is a disaster shows that when RBI is the boss it works and when RBI is not the boss it is a problem. PMC was not under RBI, it was run by state governments.
Important points made by the Guests
Aruna Sharma, Member, Digitisation Committee, RBl
Ajay Shankar, Former Secretary, DIPP, Ministry of Commerce & Industry, GoI
Subhomoy Bhattacharjee, Consulting Editor, Business Standard