Money & Banking
Economy & Nation Exclusive
Old Gyan about Public Sector Banks
What the new government says about PSBs is old hat. We need some action on the ground
 
Was the issue of merging public sector banks (PSB) resurrected or buried at the prime minister’s (PM’s) Gyan Sangam with bankers in Pune this January? It is hard to say, because media reports and interpretations about what was discussed are often contradictory these days. 
 
But it doesn’t matter. Remember, a trans-harbour bridge, linking Mumbai to the vast hinterland to ensure development and dispersion of population, is not even high on the priority list, 60 years after it was first proposed in 1954. The fact that Mumbai is bursting at the seams, and its infrastructure is crumbling, has made no difference to politicians across parties that are controlled by land-sharks. 
 
In comparison, the proposal to merge and consolidate PSBs is rather young; it hasn’t even celebrated a silver anniversary since it was first proposed by the Narasmiham Committee in 1991. In the intervening decades, there have been dramatic changes in finance, banking and its regulation globally and at home. But the debate in India has remained the same—sharply polarised, inconclusive and unwilling to address the core issues of corruption, governance, accountability and political interference. 
 
Indeed, on 6th January, the finance ministry’s circular, in the wake of the Gyan Sangam, is the first official directive to PSBs and government insurers that there will be no interference in commercial decisions, transfers and posting. Narendra Modi asked bankers to act without fear of favour, but on the basis of objective, spelt-out policy. Deviation from the policy will, however, lead to action (unless the reason for the exception was clearly articulated) because ‘accountability was essential’. Importantly, the circular also called for a robust grievance redressal mechanism for borrowers, depositors as well as staff, with an opportunity for the aggrieved person to represent his case at least at two levels.
 
We need to see whether the government plays its role by ensuring the most deserving persons are selected as managing directors (MDs) to the top four, still headless, banks. Non-executive chairmen must also be accountable for oversight over the MD’s actions and these posts must not be mere sinecures for retiring politicians, bureaucrats and politically-affiliated professionals. A clean-up of the boards of PSBs is needed by removing the many notorious chartered accountants who act as conduits for industry and as collection agents of bank chairmen. You can be sure that industry and its army of lobbyists are watching intently to see if the PM’s rhetoric at the Gyan Sangam translates into real action.
 
The need for accountability and objective policies, with a clear articulation of exceptions, should also apply to the Reserve Bank of India (RBI) in its role as banking regulator. While RBI must be fiercely independent when it comes to monetary policy decisions, there has to be much greater accountability and transparency in its role as a banking regulator and supervisor. This is sadly missing and was evident in decisions, such as the licensing of ‘new private’ banks in the early 1990s; appointments to its board of directors (no term is prescribed for outside directors) and many investigations into regulated entities that are buried or quietly condoned. 
 
At Moneylife, we are concerned about how this affects ordinary customers. Already, the banking industry, represented by Indian Banks Association, operates like a cartel. Will it get worse after mergers and consolidation? Dr KC Chakrabarty, former deputy governor of RBI, says that the answer to ensuring better customer service is to have more banks and more competition. The argument in favour of merger and consolidation of PSBs is that India needs big banks for economy of scale and to fund large infrastructure projects. 
 
After the Gyan Sangam, we heard that the government may consider merging small PSBs with big ones. Although the decision was left to their board of directors, the government could provide a timely nudge to create big, well-run global banks. But we have heard such talk since 1991. Even the speculation about ideal mergers based on the individual culture of banks is not new. Yet, we have not even seen the merger of subsidiaries of State Bank of India (SBI) (barring two) to form a single entity, leave alone their merger with SBI to form a banking monolith. 
 
All we have seen since 1991 are a few bailout mergers forced on PSBs by RBI. These include the merger of Banaras State Bank and Memon Cooperative Bank with the Bank of Baroda; Nedungadi Bank with the Punjab National Bank; United Western Bank with IDBI Bank and Global trust Bank (GTB) with the Oriental Bank of Commerce.
 
Look at what happened to the private banks licensed in the early 1990s; many of them with extremely strange antecedents. Times Bank was the first to merge with HDFC Bank. Centurion Bank and Bank of Punjab—two other strange licences, first merged with each other and were, later, acquired by HDFC Bank. These do not including the shady CRB group (which had a provisional banking licence), which collapsed in the mid-1990s, and GTB which was bailed out post-2000. That apart, ICICI Bank took over Bank of Madura and Bank of Rajasthan, and Kotak Bank recently acquired ING Vysya. In effect, only a handful of new banks were licensed over the past 25 years but an equal number (from the old and new crop) have vanished. 
 

The merger and consolidation of large PSBs, if it ever happens, will further reduce the number of banks in the country and kill competition. This is bad for the consumer, because banks will operate even more like a cartel in that situation. We also need to mobilise public opinion on the circumstances in which having big banks, capable of funding large infrastructure projects, is in India’s interest. 
 
The big learning from the global financial crisis is that ‘banks that are too big to fail’ are bailed out by the exchequer and the entire country pays the price. However, profits and bonuses are cornered by top management. While India claims to have escaped the global financial crisis, PSBs are in a mess today because they were big lenders to many mega-scamsters of the UPA regime and shaky infrastructure projects (telecom, coal, power, realty and SEZ). PSBs were also under pressure to bail out all the realty companies that drove up property prices in our cities and have kept them high for the past five years despite pitiful sales. Do we really want bigger banks to do more of this?
 
It is also important to remember that, despite nationalisation, 600 million Indians remain un-banked and even the large numbers touted by the PM’s  Jan-Dhan Yojana is just a drop in that ocean. There is no evidence that large, merged PSBs will reach out to a larger swathe of Indians, beyond the tokenism of opening no-frills accounts to please the government in power. 
 
Over 40 years of corruption and influence-peddling through PSBs is not going to vanish overnight, just because Mr Modi has demanded accountability in return for operational freedom. Also, let’s not forget, that the PM has not promised full freedom or autonomy to PSBs. He has said that there will be “no political interference, but there could be political interventions for implementing programmes for rural housing and financial inclusion.” 
 
Better managed PSB, more accountable CEOs, a board of directors that has no touts for politicians and industry, will ensure a substantial transformation, even without rushing to cut government holding or to merge banks. The issue of capital infusion to meet capital adequacy norms remains; but well-managed PSBs will give government a significantly higher valuation when it wants to dilute its holding. But Mr Modi first needs to demonstrate that he means to walk the talk on bank accountability. 
 

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COMMENTS

Jyoti Dua

2 years ago

A good article on banking industry.

SuchindranathAiyerS

2 years ago

In a case of National multiple myeloma of which Bharath Sarkar ki Sampathi is just one vital organ, banks are just one part, the Gyan Sangam is not even cosmetic surgery. It is just an application of rouge on the effected part.

Dayananda Kamath k

2 years ago

Gyan sangam the govt has given them an assurance that govt will not interfere in posting and transfers. but actually this is the weapon they use to run their dictate. so govt has actually given a licence to the psb chiefs to mismanage.
In a PSB investment department is incurring heavy losses but it is not being brought to the notice of the board in violation of board directives. Stop loss concept was not at all implimented in the bank. bank has lost crores due to this. As an internal auditor auditing the investment division brought out this. One of the executives who was in the department for a considerable time remarked this is the first time we feel a real audit is taking place. But this special report was not even placed before the audit committee. and internal auditor was transferred out of the department unceremoniously before his term. He brought this to the notice of the chairman who revoked the transfer. but within 2 months a fresh transfer order is issued and this time even cmd did not bother to intervene as the auditor has submitted one more report where even chairmans power have been brached.

ramchandran vishwanathan

2 years ago

Before considering the merger of Public sector banks , the respective banks must focus on reducing their NPAs . Government needs to intervene to get wilful defaulters (Kingfisher , Spicejet, Deccan 360, Deccan Chronicle to name a few) to pay back the huge sums taken as loans. Once this happens then consider how the fitment happens in terms of reach , culture of the respective Banks. Just merging entities is a recipe for disaster.

MG Warrier

2 years ago

The issues raised in the article and discussed in the comments(first six) are very relevant. The financial sector reforms in the Indian context need to be revisited. The initiatives so far(new private sector banks, FSLRC, new bank licences, small and payment banks, Mahila Bank, Banking Correspondents and so on) have not tried to reform Indian financial sector to meet the needs of the day. Off the cuff suggestions like ‘privatise PSBs’, ‘make changes in institutional structure’, ‘make RBI more proactive’ and so on are being picked up by policy makers as and when they match their ‘individual thinking’. I have tried to record some thoughts on these issues in some detail in my book “Banking, Reforms & Corruption: Development Issues in 21st Century India"

Advocate Navneet Sarin

2 years ago

The writer of this article is appeared to be confused some what or may be he wish to confuse the readers. I doubt if the figure of 600 million is correct but even if correct. One must understand the Banking facilities which is available with ordinary Indian is from the PSB's and not from the Private Banks. On one side the onus of social banking was put on the PSB's and on other side you expect them to survive commercially. The restrictions on PSB's on lending must be shared with all Banks. The Private Sector Banks must be brought to level playing field.The minimum account balance and account maintenance charges must be defined by RBI and should be applicable to all the Banks.
The salaries and incentives and social responsibilities while employing the staff must be made equal. Due to poor salary structure PSB have failed in attracting and retaining the bright young employees. The salary of a Government class 4 staff is even higher than the officer of Public Sector Officers. The quota system applicable in Banks discourage good employees as there is no room for excellence. The performance of PSB banks despite all these handicapped is marvelous. If Government really wish to improve their health give them a level playing field, force Social Banking on Private Sector Banks. And see the results.

vswami

2 years ago

Reaction A good write-up, with the underlying message that in the 'sangam' the one most crucial factor conspicuously absent, not a trace of it, is, - 'Gyan', old or new. in its profound sense.
Yes or No to the idea of Merger or Consolidation, what is the most wanted hence requiring to be forced through, in the larger interests of the 'stake holders', are : 1. Uniformity in the norms, rules, standards and practices to be clearly stipulated, mandatory, and strictly followed by the entire banking industry, particularly PSBs and other large size banks; 2. For each and every transaction, be it with depositors or borrowers, or any other,any deficiency in documentation , lacking in clarity, howsoever remote or otherwise that be, must be eschewed; if however any obtain,ought to be seriously viewed,and interpretation must be favorable to the aggrieved customer,not the erring bank.
3.For settling prima facie genuine grievances/complaints of customers,instead of the presently obtaining,- and required to be followed,-long route,an effective dispute settling mechanism must be established, for speedy and satisfactory resolution, but without the hassles being faced with in resort to consumer courts. In short, what is called for is an outright simplification of the attendant procedure. procedure.the

Gopalakrishnan T V

2 years ago

The banking system has been deteriorating over a period is a well acknowledged truth and the result is seen in the real economy with its equally deteriorating performance over a period. banks have become greedy and to satisfy their greed they formed a cartel and dictate their own terms and conditions ignoring the presence of the RBI and the needs of the people and the economy.The competition is not seen in their service to customers and in their efficiency in managing the credit portfolio or in expanding their business to cover the whole country. A LARGE SEGMENT OF THE POPULATION IS still out of the banking fold despite making a hue and cry on Financial inclusion and inclusive growth is a reflection of the inefficiency of the Banks Board, RBI's functioning in developing a healthy competitive banking and over all laxity in Governance standards. The very fact that despite the deregulation of SB interest rate the banks have failed to implement the same for their own interest and healthy competition is an indication that the banks have lost their competitive business acumen and they are satisfied with lazy banking expecting continuous support from the Government through capital induction and protection from banks failures through budgetary support.Banks are not run on professional lines but still they survive is only because of the fact that the Government backing is there. The middle class have no other choice but to invest their savings in banks is also fully exploited by the banks. The article by Mrs Dalal should be an eye opener for the RBI, banks and the Government to have a very serious introspection and take some concrete measures to make the banks professional in their business and provide the much needed support to the real economy to expand and grow. A lot needs to be done to strengthen the banks.

SuchindranathAiyerS

2 years ago

Given the addiction of India's plunderers to the "Bharath Sarkar ki Sampathi", latifundia, all change is like a New Year resolution to give up smoking. It is unlikely that anything will change until: (1) Inequality under law and exceptions to the rule of law are expurgated from the Constitution and laws of India. (2) Bribe Taking is defined as criminal extortion or treason and made a capital offense with special rules of evidence and special courts with summary powers (akin to a Military Court Martial). (3) All court proceedings are video graphed and archived for public viewing and can be used as evidence to prosecute Judges and Magistrates at all levels under special laws and special courts with summary powers akin to a military Court Martial, for insouciance, negligence, disregard for law and propriety, behaviour unbecoming of a Judge such as lack of etiquette and manners and (4) every job on the "Public" i.e. Government Pay Roll has specific and unique Key Responsibility Areas, Key Performance Parameters and Objectives for which they are held accountable on pain of summary dismissal for non-performance or life imprisonment for treason for sabotage under special laws and special courts with summary powers akin to a military Court Martial.India is like the proverbial Aegean Stables. It is drowning in feces and urine collected for 68 years in a commode called the "Constitution, Laws and Methods of Administration" on which nobody has pulled the flush. If India does not do so soon, a latter day Honourable East India Company will appear to pull the flush and excise a reasonable return for their effort in doing so. This may not be a bad thing as they and the British Crown gave India a lot more than they took whereas the ruling scum of the Republic of India have taken without giving anything worth while for the last 68 years.

Gupta

2 years ago

Privatisation accompanied by a strong regulator is the only answer to this problem. Everything else is patchwork. Privatise 80% by number of the smaller PSU Banks and reduce shareholding in the larger ones to below 20% or 10%. Just like no one entity is allowed to hold a big stake in private banks, the same rules should apply to Govt as shareholder of PSU Banks.
Once this is done, there would be no need for complicated restructuring rules which help bankers to park the problem for the future and feed inefficiency in the interim.

R Balakrishnan

2 years ago

Brings forth the issue of crony capitalism vs government oversight very nicely. A sector like Banking has its merits and demerits of private and public. A public ownership with good oversight and quality management is perhaps a desire. If the babudom can realise this, there is light at the end of the tunnel.

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