Bank privatisation: Perilous and detrimental to the nation’s interest

Dr. Santosh Kumar Mohapatra*

Privatisation has been a major headline since India embraced liberalisation process in 1991. But this anti-people policy is more pronounced during the present Modi regime. In past, disinvestment or privatisation of the public sector was done to raise resources for modernisation, expansion of that industry. Later, the objective was changed to raise resources to bridge the fiscal deficit.

But since 2019, Narendra Modi rode into power a second time, ideological assault is made on the public sector with PM Modi telling, “Public sectors are born to die”. Privatisation policy is used to weaken or decimate the public sector to help the private sector grow. The glaring example is how BSNL was annihilated to help JIO to grow.

But the most dangerous trend is seen now with a serious attempt being made to privatise public sector banks and insurance. In the Union Budget presented in February, Finance Minister Nirmala Sitharaman had announced the privatisation of two public sector banks (PSBs) and one general insurance company in the year 2021-22 as part of the Centre’s disinvestment plan. The NITI Aayog has been entrusted with the task of identifying the public sector units (PSUs) in strategic sectors which can be merged, privatised, or made subsidiaries of other PSUs.

The government has already privatised IDBI Bank by selling its majority stake in the lender to LIC in 2019 and merged 14 public sector banks in the past four years, which has brought down the number of public sector banks from 27 to 12 in three years between 2017 and 2020. Life Insurance Corporation of India acquired 51 percent in IDBI Bank in 2019. Since then, LIC’s stake has come down to 49.24 percent, as the bank’s equity has expanded. The government owns 45.48 percent in the bank.

The government stake in 11 other public sector banks varies between 97.70 percent (Punjab & Sind Bank) and 62.93 percent (Canara Bank). In five banks, it is at least 90 percent. To pave the path for privatisation, the Bank Nationalisation Act has to be amended. The government stake needs to come down below 51 percent

Before the bank nationalisation laws can be repealed, the PSBs have to be transferred from under these acts to the Companies Act. The idea is to remove the policy-related constraint which caps the voting rights at 10 percent for a non-government shareholder irrespective of shareholding before the government sends out an investment invite for bank privatisation.

The key to the public sector character of a bank is a clause in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (popularly known as Bank Nationalisation Act), which does not require the government to pare its stake in such a bank below 51 percent. The State Bank is governed by a different Act; the floor for the government stake in the bank is 55 percent. Currently, it is 56.92 percent.

The government has listed the Banking Laws (Amendment) Bill, 2021, for introduction and passage during the current winter session of Parliament to bring legislative amendments in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. There are many other changes that need to be done.

The Bill aims to amend banking companies’ acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs. The names of the two PSBs are yet to be revealed.

Bank employees and officers are vehemently protesting the government’s decision to privatise banking sector as the same will affect the interests of the masses and our economic growth, the prosperity of the nation. A new mood of resistance is emerging in India.

It may be noted that the successive Governments have been making repeated efforts to weaken public sector banking and to encourage private sector banks. Various Committees were formed by the Governments and all these Committees lastingly recommended as the government desired and proposed privatisation of Banks and opening up the banking sector more and more to the private sector.

Narasimham Committee (1991), Narasimham Committee II (1997), Verma Committee (1999), K  V Kamath Committee (1999), Privatisation Bill (2000) by Vajpayee Government, Tarapore Committee (2006), Raghuram Rajan Committee (2007), Anwarul Hoda Committee (2008), RBI Committee (2013), Nachiket Mor Committee (2014), PJ Nayak Committee (2014), Gyan Sangam (2015-16), FRDI Bill (2017). The P.J. Nayak Committee had said, among other things, that government cedes control of nationalised banks and cut its stake below 51 percent.

The intent has now been obviously exhibited through government’s discrimination in capitalization, dilution of stake in PSBs, illogical policies cheering Private Sector Banks, attempts of privatization, allowing licenses of Small Banks and Payments to private corporate, blaming the Public Sector Banks alone for the alarming position of NPAs, showing them in poor light. But the reality is completely different.

Public Sector Banks Have Rescued Private Banks

Some argue that private banks are more efficient, but many private banks have collapsed and were rescued by public sector banks. Before nationalisation, from 1913 to 1968, 2132 banks were closed, liquidated, ceased operation, amalgamated, etc. After nationalisation from 1969 to 2020, 25 private banks have failed which are rescued or taken over by public sector banks. For example, Global Trust Bank Ltd was taken over by Oriental Bank of Commerce in 2004, while United Western Bank was by IDBI Bank and Bharat Overseas Bank by Indian Overseas Bank in 2007. Similarly, YES Bank was bailed out by the State Bank of India in 2020. Recently, some top private banks were found embroiled in corruption and scandals.

The Banking Industry was Nationalised because Private Banks failed

Though the country attained independence in 1947, it remained backward economically. Basic and broad-based economic development was the need of the hour. But unfortunately, the then Banks, which were all in private hands and many of them owned by big industrial and business houses, did not come forward to contribute to the process of development. The agriculture sector, Rural and Cottage Industries, Small Industries, and businesses, which were the mainstay of our economy and other pivotal sectors were neglected.

In this background, in 1955, the Imperial Bank of India was converted as State Bank of India under the public sector. This was followed by taking over the 7 Banks of the Princely States (ruled by indigenous Indian princes before the Indian Independence Act of 1947) as Associate Banks of SBI. This was found to be inadequate to cater to the needs of the country and its broad-based development. Hence, 14 major private banks were nationalised by Indira Gandhi in 1969 and 6 more private banks were nationalised in 1980. The government through the Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969 and nationalised the 14 largest commercial banks on 19 July 1969. State-owned banks have made great strides since nationalization.

The number of branches of state-owned banks increased from 8,000 in 1971 to 1,18,000 in 2021. Total bank deposits which stood at Rs 5,000 crore in 1971 has reached Rs 156 lakh crore in 2021. Similarly, the total advance has increased from Rs 3,500 crore to Rs 110 lakh crore.

PSBs have acted as catalysts in economic development and have played a key role in the development of agriculture, small trade, small business, SSI, transport, and in the upliftment of weaker sections of the society. Public sector banks mobilise savings especially financial savings that spur investment and thereby growth.

Public Sector Banks are Earning Operating Profit

Many spurious arguments are made to justify privatisation of public sector banks. It is argued that public sector banks are inefficient and incur losses. But despite the onslaught of privatisation, ideological attacks, public sector banks are making a profit. The operating profit of state-owned banks is increasing every year. It has increased from Rs 76945 crore in 2009-10 to Rs 197374 crore in 2020-21. In the last 12 years, public sector banks have earned operating profits of Rs 14, 55,218 crores. At times, banks are found incurring losses or net profit becoming negative due to higher provisioning for NPAs in some years.

However, PSBs in aggregate recorded a profit of Rs 31,816 crore in 2020-21, the highest in five years, despite a 7.3 percent contraction in the economy in 2020-21. The primary reason for PSBs to post a Rs 57,832-crore turnaround in the last fiscal, from a loss of Rs 26,015 crore in 2019-20 to a combined profit of Rs 31,816 crore.

It is to be noted that the net profit of PSBs surged to Rs 14,012 crore in the quarter which further rose to Rs 17,132 crore in the second quarter ended September 2021. This is despite the Capital Adequacy Ratio (CAR) of PSBs snowballing to 14.3 percent at the end of June 2021 while the provision coverage ratio of public sector banks rose to an 8-year high of 84 percent. In some cases of the non-performing assets, banks have done provisions up to 100 percent. During the last financial year, PSBs raised capital funds to the tune of Rs 58,697 crore, the highest amount mobilised in a fiscal.

NPAs Is much high despite huge written off

The government argues that various reforms are undertaken by the government including recognition, resolution, and recapitalization resulted in a progressive decline in non-performing assets (NPAs) and a subsequent rise in profit. NPAs of PSBs declined from Rs 7,39,541 crore as on March 31, 2019, to Rs 6,78,317 crore as on March 31, 2020 and further to Rs 6,16,616 crore as on March 31, 2021 (provisional data).

However, overall non-performing assets (NPAs) or bad loans of banks have declined by just Rs 61,180 crore to Rs 8.34 lakh crore at the end of March 31, 2021. The overall bad loans of banks as of March 2020 stood at Rs 8.96 lakh crore. The banks wrote off Rs 2.02 lakh crore during the course of the year. This means that bad loans of banks should have fallen to Rs 6.94 lakh crore (Rs 8.96 lakh crore minus Rs 2.02 lakh crore) not Rs 8.34 lakh crore.

NPAs and loan write-off is a scam by another name

Gross NPA s stands at Rs 8.34 lakh crore at the end of March 31, 2021, despite a huge loan write-off. Banks have written off Rs 2.02 lakh crore in 2020-21 and a whopping Rs 11,68,095 crore worth of bad loans, or non-performing assets (NPAs), in the last ten years, very close to the government’s gross market borrowing of Rs 12.05 lakh crore projected for 2021-22 in the Union Budget. Of the total write-off in 10 years, as much as Rs 10.72 lakh crore write-offs have happened since the financial year 2014-15 (in the last 7 years) when the Narendra Modi government assumed power.

Once a loan is written off, it’s taken off the NPA book. It helps the bank to lower the NPAs and get the tax benefits. But actually, the defaulted loan still exists as it’s a book entry. But in the public sector, only 14 percent of loans written off are recovered. The recovery rate was around 23.4 percent between 2000-01 and 2012-13. It means from NPAs, each rupee written off, 86 paise lost, misappropriated, or accrue to borrowers, which is a scam by another name.

As of 30 September 2019, 17 public sector banks have a total of 2426 wilful defaulter loan accounts aggregating to Rs 1.5 lakh crore. A wilful defaulter is a borrower who has the ability to repay the bank but wouldn’t so deliberately. Here, the intent to pay back the money to the lender is absent. Vijaya Mallya is a glaring example.

Who are Beneficiaries of Banking Frauds?

There is talk of growing NPAs and loan write off but the Modi government has also weakened the banking system by allowing the fraudsters to either continue functioning in the country or leave the country without making any efforts to recover the fraud amounts. The Reserve Bank of India (RBI) report says the cases and amount have been on a rapid rise since 2014-15. The RBI reported bank frauds amounting to Rs 1,860 crore in 2008-09, Rs 1,999 crore in 2009-10, Rs 3,816 crore in 2010-11, Rs 4,501 crore 2011-12, Rs 8,591 crore in 2012-13, Rs 10,171 crore 2013-14.

But after Narendra Modi rode into power, quantum of frauds increased manifold. The RBI reported bank frauds amounting to Rs 19,455 crore in 2014-15, Rs 18,699 crore in 2015-16, Rs 23,934 in 2016-17, Rs 41,167 crore in 2017-18, Rs 71,500 crore in 2018-19, Rs 185,000 crore in 2019-20 (election year) and Rs 138,400 crore in 2020-21.

In other words, before Modi came to power, in the last six years (2008-09 to 2013-14), the RBI reported bank frauds amounting to only Rs 30,938 crore. But during the Modi regime, in six years (2014-15 to 2019-20), the RBI reported bank frauds amounting Rs 3,59,755 crore. The number of reported cases of fraud went up by 47 percent in three years between 2017-18 and 2019-20. Till March 2021, Banks have lost Rs 4.92 lakh crore through banking frauds which is equivalent to 4.5 percent of advance.

Until 2019-20, the majority of the frauds, about one-half, were reported in public sector banks and the private sector banks accounted for around one-third of all the frauds reported across all bank groups. However, the share of frauds in public sector banks of the total frauds in the system decreased in 2020-21 while that of private sector banks increased. In 2020-21, public sector banks accounted for 39 percent of the fraud cases reported while private sector banks accounted for more than 50 percent.

Insolvency and Bankruptcy Code (IBC): To help defaulting companies escape punishment

The Insolvency and Bankruptcy Code (IBC), like the Goods and Services Tax (GST), was touted as game-changing legislation, which was enacted on May 28, 2016, for effective time-bound recovery of debts to encourage entrepreneurship. But, the IBC is positioned as a framework for timely resolution of the debt of insolvent companies, rather than a mechanism for recovery. But there are pitfalls to achieving either of these targets. But actually, loans are settled at much lower rate.

As of March 2021, public and private sector banks, non-banking financial institutions, and other financial lenders to companies undergoing corporate insolvency resolution process (CIRP) have taken a cumulative haircut of Rs 3.22 lakh crore — or 61.2 percent of their admitted claims since the Insolvency and Bankruptcy Code (IBC) regime was rolled out five years ago.  As on August 2021, in at least 363 major NCLT resolutions since 2017, banks have taken an average haircut of 80 per cent.

A Parliamentary panel has cautioned the government over “disproportionately large” haircuts taken by lenders under the Insolvency and Bankruptcy Code (IBC) and noted that frequent changes to the newly enacted law could alter its original aim. The panel quizzed the Centre on haircuts as high as 95 per cent.

The Siva settlement and mishandling of several high-profile cases shows that things are sliding badly. Hindustan Times on June 25 reported that the government could review the legal provision that allows for the withdrawal of an insolvency case in favour of an often-negligible one-time settlement (OTS). This was in the context of Siva Industries Holdings Ltd.

In April, IDBI Bank-led lenders discussed and approved an OTS proposal of Siva Industries where creditors agreed to take a 93.4 per cent haircut to settle dues of Rs4,863 crore. On June 15, the National Company Law Tribunal (NCLT) questioned the extensive haircut (95.85 per cent) that lenders agreed to take in the insolvency resolution of Videocon group companies.

More Bailouts in Foreign Countries

Actually, the world has experienced many financial crises in the world because of the collapse of private financial institutions, and governments around the world have spent trillions of dollars to bail out those crumbling institutions. The glaring example is the global financial crisis of 2007-09. Wall Street got a $1 trillion bailout under The Troubled Asset Relief Program, or TARP, the bailouts of AIG, Fannie Mae, and Freddie Mac, and comes up with a $632 billion sum.

Lastly, closer to the real point, Kessler disputes the numerous studies showing the real bailout outlay was through the Fed, which the Sanders campaign had said was anywhere from $7.7 trillion (the number Bloomberg used in its coverage of secret Fed lending) to $29 trillion (the number the Levy Institute at Bard College calculated, including guarantees and other forms of aid).

As Gretchen Morgenson pointed out when information about Fed bailout programs first became public, just six banks — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley — were the recipients of 63 percent of the Fed’s average daily borrowing, representing about a half-trillion dollars at peak periods just for those firms.

The Special Inspector General’s office for the TARP program, meanwhile, issued reports for the bailout. This oversight panel led by Bailout author and former SIGTARP chief Neil Barofsky put the gross outlay — including the TARP, and other Treasury and Fed expenditures — at $4.6 trillion.

Conclusion

While the government is desperately moving towards privatisation, it may not be a panacea for the economy. There is always the risk that privatisation becomes politically driven and pursued for the vested interests of different interest groups or individuals rather than as a coherent part of stimulating private investment. It may augment short-term revenue but there are no guarantees that the process will lead to building competitive markets. In the long run, the government will lose dividends too.

By handing over financial savings to private companies, it will help private companies to gain control over our savings-oriented economy, thereby destroying growth and development.

The privatisation of PSBs will remove the sovereign guarantee behind the PSB deposits and make financial savings less secure. Privatisation is not the solution for various challenges such as Non-Performing Assets (NPA) faced by the PSBs as privatisation of the PSBs tantamount to selling the banks to private corporates, many of whom have defaulted on loans from the PSBs.

The experts further argued that the privatisation will also result in job losses, branch closures, and financial exclusion. The privatisation will shrink employment opportunities ,will result in financial exclusion and promote crony capitalism.

 

 

The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]

 

DISCLAIMER: The views expressed in the article are solely those of the author and

do not in any way represent the views of Sambad English.