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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.

Context:

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.

Background:

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

  • On March 5, 2020, the Reserve Bank of India (RBI) imposed a 30-day moratorium on YES Bank, superseded the private-sector lender’s board, and appointed Prashant Kumar, who was serving as chief financial officer and deputy managing director at State Bank of India (SBI), as an administrator. Under the terms of the moratorium, deposit withdrawals were capped at Rs 50,000 per person.
  • The bank’s loan book on March 31, 2014, was Rs 55,633 crore, and its deposits were Rs 74,192 crore. Since then, the loan book has grown to nearly four times as much, at Rs 2.25 trillion as on September 30, 2019. While deposit growth failed to keep pace and increased at less than three times to Rs 2.10 trillion. The bank’s asset quality also worsened and it came under regulator RBI’s scanner.

PMC Bank Crisis

  • Punjab and Maharashtra Cooperative Bank (PMC Bank) has been facing regulatory actions and investigation over alleged irregularities in certain loan accounts. Loans given to financially stressed real estate player Housing Development & Infrastructure (HDIL) are at the centre of the investigation.
  • The crisis at PMC Bank first came to light on September 24, 2019, the day the Reserve Bank of India (RBI) placed curbs on the activities of the Mumbai-based bank for six months. The central bank also limited the amount a customer could withdraw from their account during the next six months — to Rs 1,000 at first, and later to Rs 25,000.
  • The Enforcement Directorate has filed a money laundering case in the PMC Bank scam.

                                     bank recapitalisation: FM Nirmala Sitharaman announces PSU bank ...

Way Forward:

  • 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   

  • The banks were nationalized to give a push to the targeted programs of the government and then ensure those targets are fulfilled.
  • Earlier we do not have so much of penetration of the banks, now we have both the banks and non-banks institutions, we have the NBFCs, microfinance institutions and rural banks, now post office also has got a bank license and it will also be stepping into giving credits in the future, so they will graduate from payment banks to other, the cooperative banks have also come on to the digital mode that is the CBS (Core Banking Solution) platform.
  • So, under this scenario, now the penetration is very very high and why this whole debate started off for the PSBs to be privatized was because what came up with standing committee was of high NPAs which they were having. The CRAR (Capital to Risk (Weighted) Assets Ratio (CRAR)) rates are very high and also the PCA (Prompt Corrective Action), so the Banks were not left with larger liquidity to lend.
  • Now recently post COVID-19, there has been a lot of corrections where the reverse repo rate has brought down so the banks have more liquidity and banks are able to lend more but the negative part of it is banks are suffering through the fear factor that they are not lending, because of the NPAs, because of the NCLT (National Company Law Tribunal), because of the action taken against some of the bank officers which could have been malafide.
  • Recently in the case of Yes Bank, where RBI has to step in to salvage it, so we have a case of a private bank where the equity has to be increased and the equity was purchased by the organisations of the Public sector units or a Public sector banks as well as RBI to salvage Yes bank and on the other side we are going for the merger of the banks which were not performing or did not have a good asset value.
  • So, in this scenario going for privatization will be too early, we have to stabilize the entire hierarchy of banks we have created started from banks to small banks to post banks, the cooperative banks getting into the fray, and NBFCs also.

Ajay Shankar, Former Secretary, DIPP, Ministry of Commerce & Industry, GoI 

  • This is not the right time to go for privatization because the economy is going through very difficult phase.
  • Political reality of India is such that at the end of the day government does need to ensure that all bank depositors get their money back whether they are ordinary deposits or fixed deposits.
  • It is necessary to go back and rethink the basics that we increase RBI supervision or whatever we do but we make sure that all banks are able to assure their depositors that their money is safe and the RBI and the government is behind all banks.
  • The problem with PSBs is of two kinds; one is the Professionalization and management and which would be necessary even if the equity is brought down to 26 percent and then there is issue that you have to get rid of fear factor.
  • It is necessary that banks start getting confidence in lending.
  • There are two other ideas whose time has come; one is to take out all the policy-related NPAs from the books of the banks and put them in a bad bank, the credit must go to the power sector and as an infrastructure loan. The balance is part of the normal market and if the promoters have to become bankrupt asset sales take place it is fine, but the infrastructure sector certainly deserves a different treatment.
  • We should have long term development financial institutions which provided the long term credit to power projects and highway projects.
  • Let the bank do normal commercial lending for normal industries.
  • The government should take over the real estate companies once it has gone bankrupt, just maximize them inject them fresh equity, complete all the projects, take on the land bank in a few years time when the economy recovers, it will have a huge value and only the sovereign and the state can do it.

Subhomoy Bhattacharjee, Consulting Editor, Business Standard 

  • Every finance minister for the last 20 years has tried to tell bankers that don’t worry go ahead go do some commercial loans.
  • The fear factor of the banks is something which cannot be taken out of the state run banking system.
  • It is impossible to lay down rules, it is impossible to say that this loan will not come back to her.
  • The primary reasons why state run banks not a present circumstance to be had in the current banking scenario now in the past or in the future, you cannot have a government running businesses, this should not be conflated with the fact that the government has to be the wicketkeeper, that is to be ensured by the deposit credit and guarantee insurance corporation.
  • So, the government does not need to stand as an additional support to ensure the depositors money are safe.
  • If a bank has to run and it has not got to be periodically bailed out by taxpayers money then banks must run on commercial principles.
  • Because the taxpayer also happens to be the poorest who do not necessarily go to the bank so we are ensuring an unfair call that the same money which should be going to for instance in this time when we are talking about migrant labours at the bad end of the state they need stimulus, why should that money instead be going to recapitalize banks.
  • So, banks have to run on commercial principles and if they cannot run on the commercial principles then they have no business to be existing and least of all the government does not have the right to run a bank.
  • There is also a problem about the 26 percent, it is a very dangerous one, because either somebody who owns a bank should run. If it is going to run by the government with just 26 percent then we are introducing an element of risk which means that even though the majority shareholder is somebody else but the government will exercise the right to veto, which is a dangerous principle, it will actually further erode the bank’s ability to run as a commercial industry.

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