April 2, 2022
Hello and welcome to All Indians Matter. I am Ashraf Engineer.
You must have heard of the nationwide strike called by bank employees earlier this week against the government’s move to privatise some public-sector banks. This strike call was later supported by other unions such as those of the roadways, transport and electricity workers. Banking services were impacted as employees of public-sector, private, cooperative and regional banks joined the strike. Alongside, various trade unions and Left organisations protested against the anti-people policies of the Central Government. Why is the government keen to privatise at least some public-sector banks? Why is it being opposed? And what does it mean for you?
Think of the banking system as a network of vessels supplying blood to different parts of the economy and the banks as trustees of public money. So, you, the depositor, has more at stake when it comes to the stability of public-sector banks than the government, which is in essence a shareholder. Also, banks are more critical to the economy than most other corporations. So, while a large manufacturing company shutting down hurts, a bank failure has greater and more widespread implications.
India’s banking sector is massive and is a driver of economic growth. So much so that, according to a PwC report, India is set to become the world’s third largest banking hub by 2040.
The government believes that consolidation of banks will secure that growth and make banks safer. Accordingly, it started down that path in 2017. From 27 public-sector banks that year, India went to just 12 by April 1, 2020. But the government wants even fewer public-sector banks, which are bigger and at least in theory more resistant to shocks like huge loan defaults. In fact, these non-performing assets – or NPAs – have turned into a major headache and a serious threat to the banking system. Many of these loans have not been recovered and in several cases the people who took them out have escaped abroad.
The banks aren’t blameless here. Many issued dubious loans and some underreported NPAs. Others pointedly avoid servicing rural areas or implement government schemes.
The various systemic issues have meant that after 1969, 36 banks failed but were saved by merging with public-sector banks.
There is a problem, no doubt, within the banking sector but the government’s solution? Let’s sell off the banks.
Privatisation has been positioned as some form of panacea for the sector when in fact what’s needed is long-term structural reforms. Selling off valuable public assets, owned by you and me ultimately, and given the antiseptic label of ‘disinvestment’, is not the answer to every problem.
First of all, let’s understand the role of public-sector banking.
It has a duty to support small businesses and has a role to play in social welfare and social justice. But, despite a push for it to do so, banks are reluctant to lend to micro, small and medium-sized enterprises or MSMEs. MSMEs are the backbone of the economy, employing well over 8 crore people and accounting for nearly 30% of the GDP. These businesses are struggling because of poorly thought out decisions like demonetisation and the disastrous handling of the COVID-19 pandemic. If they are supported, it will boost growth and benefit the banks in turn.
Banks have deep financial linkages across the economy, so their passing into private hands that may not be interested in social support will have consequences on the ground. So, what happens to these banks’ public welfare activities? Are guarantees being built into the sale contracts that these services will continue?
The bank unions are clear about the consequences – they say privatisation will result in massive job losses, branch closures and financial exclusion. They claim that, with the number of public sector banks already down to 12, the process of employee retrenchment and branch closures has already begun. The All India Bank Officers’ Confederation said late last year that the employee strength of public-sector banks fell from 8.57 lakh in March 2017 to 7.7 lakh in March 2021; 3,321 branches were shut between March 2017 and September 2021.
The confederation said privatisation would accelerate these trends and shrink employment opportunities. The Scheduled Castes, Scheduled Tribes and Other Backward Classes, especially, would be deprived because unlike the public sector the private owners are not obliged to have job reservations.
The confederation is right in pointing out that private owners will be driven by profit alone and would therefore focus on the affluent and urban areas, leading to the financial exclusion of weaker sections – particularly in rural areas.
Public-sector banks account for 65% of all commercial bank deposits and 70% of all individual bank deposits, so the common man benefits from the government guarantee backing their deposits.
On the other hand, a notable number of private banks and financial institutions have either failed or been beset by serious problems. For example, Yes Bank, Lakshmi Vilas Bank, IL&FS and DHFL.
The confederation also pointed out that privatisation would imply selling the banks to corporations, many of whom have defaulted themselves on loans taken from public-sector banks. So, far from solving the NPA problem, privatisation would reward defaulters and would amount to crony capitalism. This is why bank unions call the privatisation process a bailout for corporate defaulters rather than a consolidation of the sector.
They poke holes in the logic of the Finance Ministry, which argues that NPA write-offs are par for the course and, since recovery efforts continue even after the write-offs, they do not benefit the defaulters. The confederation said this was misleading because only Rs 86,986 crore was recovered from written-off loan accounts between 2016-17 and 2020-21. The total NPA write-off, on the other hand, during the same period was over Rs 7 lakh crore.
If write-offs, rather than recoveries, are how the government plans to deal with NPAs, public-sector banks would keep absorbing financial losses and their capital would erode.
Let’s not forget the process that will be followed to sell these banks, which are in the end public assets. It could take a long time to even begin as the government will need to identify buyers, value the assets correctly, ensure employees are protected, deal with the political repercussions, etc.
So, such privatisation is not a solution at all. There is the risk of favouritism in the way banks are sold and of political motivations creeping in. The government will earn a significant amount of revenue but that’s a one-time occurrence and whether it will lead to more competitive and efficient markets is hardly a given. What will, no doubt, happen is that you and I will lose ownership of valuable assets to the mega rich. But, is that such a surprise with this government in power?
Thank you all for listening. Please visit allindiansmatter.in for more columns and audio podcasts. You can follow me on Twitter at @AshrafEngineer and @AllIndiansCount. Search for the All Indians Matter page on Facebook. On Instagram, the handle is @AllIndiansMatter. Email me at email@example.com. Catch you again soon.