It has been raining memoirs by governors of the Reserve Bank of India (RBI) in the past year or two. Three immediate predecessors of RBI governor Urjit Patel have published books in quick succession, each skirting the big elephant in the room—the gigantic bad debts of public sector banks (PSBs), estimated at anywhere between Rs8 lakh crore (officially) and Rs20 lakh crore (according to a former RBI deputy governor Dr KC Chakrabarty).
The spate of banking scams, including Nirav Modi-Gitanjali Gems, Rotomac and others, have exposed the ease with which the PSBs were swindled; these had also turned the spotlight on the need for change, with a chorus of voices in government insisting that privatisation is the answer.
Simultaneously, the government is forcing a sale of companies whose promoters are the biggest wilful defaulters—each in excess of a stupendous Rs25,000 crore.
Then there is the controversy over ICICI Bank’s CEO, Chanda Kochhar, and Axis Bank’s Shikha Sharma, where RBI has turned down the Bank’s proposal to appoint her for another term.
All this has brought back into focus some core issues like whether bank nationalisation has served any purpose; the impact of economic reforms on banks; the role of the central bank and the finance ministry; and the contribution of the political class in bringing PSBs to such a sorry mess.
Reforming the Indian Public Sector Banks: The Lessons and the Challenges, which was released on 9th April in Delhi, is an extremely important book that throws light on all these issues with a unique perspective.
The author, TR Bhat’s, is a refreshingly different voice from the usual policy wonks, bureaucrats and academics who have usually had a hard stand in support of nationalisation or for privatisation, depending on their ideological perspective.
Even DN Ghosh’s memoir gave us only a ringside view of bank nationalisation without commenting on how it has eventually turned out.
Bhat’s is a dispassionate, insider’s assessment of how government policies affected PSBs ignoring their failures and shortcomings, including worryingly high incidents of fraud and corruption at PSBs. Bhat has led the Corporation Bank Officers’ Organisation (CBOO) with distinction and has served as an officer director on its board. More importantly, he pioneered whistle-blowing by the Corporation Bank’s Union to safeguard the Bank from rapacious chairmen colluding with industrialists to dole out loans to already defaulting companies.
As an investigative journalist, I have personal knowledge of how the Union has worked to protect the Bank’s interests. The present state of the Bank’s finances only reflects how the system eventually defeated their efforts.
The book is a must-read for members of this government and its advisors whose public statements display a worrying intention to ram through global cookie-cutter solutions without investing the time and effort to find specific remedies to a uniquely Indian economic environment and savings culture.
The attempt to pass the Financial Resolution and Deposit Insurance Bill and the demand for bank privatisation (which has been slightly muted since the surfacing of issues at Axis Bank and ICICI Bank) are just two examples.
Bhat covers four issues: a) nationalised banks have acted as shock-absorbers for the economy, by taking over failed private banks after every major scam; b) nationalised banks have been exploited by every government for its political agenda, while never putting in place proper human resource policies and investing in training and skill development; c) every crisis led to the formation of a committee which painstakingly identified issues and offered solutions which were ignored (of special significance is the report of the independent commission headed by SP Shukla and backed by bank unions); d) failure of supervision by RBI was responsible for most of the scams as well as protecting large defaulters by refusing to name and shame them almost until the bankruptcy proceedings began.
Bhat also analyses the problem of the government as the owner of PSBs on five fronts—appointment of top executives, the appointment of directors to their boards, the working of the board, the internal working of the banks and failure to fix accountability.
Interestingly, the book contains a sharp rebuttal to governor Urjit Patel’s claim that RBI has no powers over PSBs, although it was already in print when Dr Patel made his startling claims at a speech in March 2018. It outlines four ways in which RBI engages with banks. Some interesting nuggets that provide a timely recollection in today’s turmoil are:
• Bad debts have been papered over, for decades, by RBI and the government and economic liberalisation provided only a temporary palliative by allowing banks to increase capital by going public and make them profitable for a short interval.
• The scandal of loan write-offs ends up protecting wilful defaulters by wiping the slate clean. Bhat writes that after the loans were written off, the same industrialists would be granted fresh loans in other names. Such write-offs increased even as ‘loan overdues were surging’, he says. Interestingly, this government has falsely defended in Parliament the Rs2.4 lakh crore loan write-off between April 2014 and September 2017, claiming that it was a tax-saving device to clean up bank balance sheets and did not let off the borrowers. Dr Chakrabarty, has called such write-offs the biggest scandal of the century. It is important for us to remember that we, the people, have paid for these write-offs though regular bailouts and re-capitalisation of PSBs by the exchequer.
• There is a lack of accountability of the PSB chiefs and the absence of any yardstick to evaluate their performance. The worst that has happened to PSB chairmen is that they have been asked to leave. Many such appointments have been political. There has been a failure of internal and external audits, lack of action on RBI’s own inspection reports.
• The forced-mergers of failed private banks with PSBs have allowed RBI to avoid accountability for its failed supervision over the decades. Most of us recall the merger of Global Trust Bank with Oriental Bank of Commerce (which hurt the latter’s performance for two to three years), but forget other mergers of that time such as Nedungadi Bank with Punjab National Bank and Benares State Bank with Bank of Baroda.
• How a taskforce of the Confederation of Indian Industry (CII) had suggested the closure of three banks that had turned sick—Indian Bank, United Commercial Bank and United Bank of India. It led to a sharp reaction from trade unions that exposed how the banks’ losses were almost entirely due to defaults by CII members. The move was abandoned and the banks even turned around for a while. Indian Bank is by far the best PSB now.
The book stops just short of the current turmoil in banks as they struggle to deal with new provisioning norms and bankruptcy proceedings as well as frequent government diktats that force banks off track (as in the pressure of demonetisation, opening Jan Dhan accounts, taking responsibility of Aadhaar enrolment, etc) from their core banking functions.
However, the sweep of issues covered right from nationalisation to the present day allows us to understand exactly why the present debate on bank privatisation or what to do with PSBs, will not resolve the problem. At the very least, 3/4th of the newly constituted Bank Board Bureau will have a lot to learn from the 300-odd pages of this important book.