Why the public sector banks are being privatised in India?

  Privatisation of banks will deprive millions in rural areas from banking services and loans

The Modi government has decided to privatise the state owned banks in India. The Indian government has accelerated the privatisation process of at least 4 major state-run banks in the country. The government holds a large stake in Punjab and Sindh Bank, Bank of Maharashtra, UCO Bank and IDBI Bank and now wants to sell it. The central government's plan is to privatise many state-owned banks and fund a big budget by selling stakes in some banks.

There is no economic reason to privatise government banks. It is only a means to hand over public assets to the richest few, so that they can control all capital flows in the economy.

According to some economists, the Modi government wants only 4 to 5 government banks in the country. Currently, there are 12 state-owned banks in India, of which the central government holds more than 51 percent. Apart from this, 47.11% stake is in IDBI Bank. Government insurance company LIC holds a 51 per cent stake in this bank.

Apart from this, some officials have suggested to the government that these banks should be restructured before privatisation so that their losses can be reduced. Its privatization government can also offer Volunteer Retirement Scheme (VRS) to additional staff.

Under this plan, hundreds of bank branches in India and abroad can be closed, which are running in deficit. Most branches will be closed in rural areas and small towns. It will cut of rural population from banking services.

Apart from banks, Modi government has been planning to privatize larger public entities like railways, Airlines and LIC. The labour organisations are opposing the large scale privatisation in the country. The trade unions in banking and insurance sectors are against the privatisation policy.    

Is there a case to be made for privatisation to help the government raise funds and reduce its fiscal burden and avoid having to recapitalise them every now and then? It is based on an entirely flawed understanding of why the government needs to own banks. Banks are instruments through which capital flows into the economy.

They collect public savings and use that as a notional base to create money, which is then lent out for consumption and investment. Who the banks lend to determines who gets access to a nation’s savings and capital. Privatisation backers say the market is the most efficient allocator of capital. The history of India’s banks shows the exact opposite.

There are three key arguments for privatising PSBs. The first is that the private sector is more efficient, and a private owner will cut the flab in government banks and make them more profitable.

The second is that the government needs money and selling its shares in the banks it owns will help it raise funds. Finally, there’s the issue of NPAs or bad loans. Government banks are saddled with loans which are unlikely to be paid back. It means that at some point, the government might have to ‘recapitalise’ them. Pundits say taxpayers will end up paying for mismanagement by government banks. So, privatise them and everything will be fine.

It is ironical that this pro-privatisation campaign is coming at a time when three of India’s top private banks have shown serious signs of mismanagement. ICICI Bank had to sack its MD after allegations of nepotism in giving big loans. Yes Bank was almost going under and had to be saved by the government’s own State Bank of India.

Now, HDFC Bank is under a cloud over conflict-of-interest allegations in its auto-loan department. Reports also suggest that Experian Plc., one of India’s largest credit bureaus has told the RBI that HDFC Bank hasn’t given details about its retail loans in time. So much for private sector efficiency!

These banks were nationalised 51 years ago to serve the people and to provide loans to ordinary citizens. Now the question is whether the nationalised banks serve the purpose. As the Modi government’s own Economic Survey of 2016 pointed out, the private sector-driven economic boom from 2004 to 2008 was overwhelmingly funded by state owned banks. The boom years focused on building infrastructure and expanding capacities in steel, mining, power, telecom, textiles and aviation. As TT Rammohan Rao of IIM-A showed, at the end of 2014, these stressed sectors accounted for 29 per cent of all advances given by PSBs, but only 14 per cent of advances at private banks.

Was this because government banks took foolhardy decisions to lend, or was it because they had to back government policy to help private companies finance their infrastructure and manufacturing projects? It is common knowledge that many industrialists — some of whom are on defaulter lists today — used political contacts to get easy loans. Private corruption is now being passed off as a systemic problem with government ownership. Instead of reforming the management of these government banks and taking it away from the oversight of political leaders and bureaucrats, the proposal is to sell it to the same corporates who gained the most from the loose lending norms of PSBs.

On July 19, 1969, Indira Gandhi who was both Prime Minister and Finance Minister at that time decided to nationalise 14 largest private banks of the country. With Imperial Bank already nationalised and renamed as State Bank of India in 1955, this decision pushed 80 percent of banking assets under the control of the state.

Before the nationalisation of banks a few corporate houses controlled all funds, credit flowed into speculation and the agriculture sector had virtually no access to credit. Nationalisation ensured that a large chunk of India’s population could access banking facilities, farmers got loans and the state could direct the flow of credit to priority sectors.

Public sector banks, therefore, have a social role which is larger than their quarterly profit & loss statements. Selling them amounts to diminishing this social role and public control of the flow of capital.

Depositors in government banks know that even if their banks are in trouble, the government will come to their rescue. That is why, when the 2008 global financial crisis hit India, many middle-class depositors decided to open accounts with the State Bank of India, and shifted some of their money out of private banks to ensure that their savings were safe.

                                                                            Khalid Bhatti