On 19 July 1969, the Indira Gandhi-led Congress government nationalised 14 commercial banks of the country. A few days before the 50th anniversary of that important decision, the current Union Minister of State for Home Affairs Hansraj Ahir wrote to the district collector, Chandrapur, Maharashtra, that salaries for bankers who did not meet the targets under the Micro Units Development & Refinance Agency Ltd. (MUDRA) Yojana should not be paid their salaries. This
directive is very similar to the days of Mr. Janardan Poojari, former Union Minister of State for Finance, holding loan melas where he screamed at the bankers who did not achieve the Integrated Rural Development Program (IRDP) targets and handed out punishments. The politics of economics has not changed for the past 49 years of bank nationalisation.
Nationalisation of banks was dubbed as a huge reform. It was a rallying point for a lot of agitations pertaining to the banks’ reach to the poor and to sectors like agriculture and small industries, which were totally neglected.
More than 50 committees worked at the Reserve Bank of India (RBI) and government of India (GoI) to design a lead bank scheme for ensuring the spread of branches in the first place and later to monitor the targets under the priority sectors.
Initially at one-third of the aggregate lending was aimed at the designated priority sectors; the target has later been scaled up to 40%. Within the priority sector, 45% of the lending was to go to the farm sector. This behest lending, followed by loan write-off diluted the lending discipline. The number of farm loan accounts reached more than two crores by the end of 1990.
The banking reforms committee chaired by M. Narasimham in 1991 called for ushering in competition in banks through allowing private banks and creating large spaces for the public sector banks (PSBs) through consolidation. Its major recommendation for winding up the department of banking remains on paper till date. Economists treated this as a watershed in banking reforms, after which PSBs shut down many of their ‘unviable rural branches’. Let us see the performance of banks since 2001.
The RBI quarterly bulletin data on Indian banking shows that while the total credit deposit ratio at the end of December 2001 was 57%, it moved to 77% in 2012 but declined to 75% in 2017. Metro centres constituting 8.88% of branches in 2001 moved up to 17.6% in 2017. During this period, metro deposits moved up from 42% to 51.5% while credit moved up from 60% to 63.8% constituting 93% Credit-Deposit (C-D) ratio. Top 100 centres had a C-D ratio of near 90% at the end of December 2017. Urban, semi-urban and rural centres had a C-D of ratio 53, 57 and 59% in 2017 compared to 68, 33 and 41% in 2001 respectively.
This performance of banks whittles down at once, when viewed in the context of ever rising non-performing assets (NPAs) for the banking sector as a whole, with significant contribution from the nationalised banks. NPAs have now shot past the Rs10 lakhs crore mark, notwithstanding the legal facilitation for recovery provided through the Debt Recovery Tribunals (DRTs), Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act (SARFAESI Act), Asset Reconstruction Companies (ARCs), Corporate Debt Restructuring (CDRs), Scheme for Sustainable Structuring of Stressed Assets (S4As), Asset Quality Ratings (AQRs), Insolvency and Bankruptcy Code (IBC) and regular periodical reviews by the Ministry of Finance.
Government ownership of banks at the time of nationalisation was to ensure that the poor and the neglected sectors received their due share of credit. The return on investment for the government was more in ensuring that the welfare objective is achieved than the monetary return. But profit maximization became the major post- liberalisation concern and this has made P.J. Nayak recommend that the government reduce its share and allow these banks to be brought under the Companies Act.
Speed of service by employing technology replaced the essence of quality and better reach. Banks eventually became servants of technology. Discretion in loan sanctions moved around the templates and unqualified projections followed lack of supervision. Cutting costs resulted in cutting the supervisory manpower. Dwindling domain knowledge, greed, and failure of governance have pushed under the carpet the frauds and malfeasance in the nationalised banks to paint a picture that it was nationalisation that played the spoilsport.
The question before the nation today is “Do we need nationalised banks?” My answer would be a straight ‘Yes’. At the same time, I argue for thorough change in governance and shutting down the unprofessional Department of Banking. RBI would do well to appoint a high level committee to get a new direction and energy to deface the marred image of Indian banking that is driving away investments even in a growing economy.
NPA reviews commenced at the wrong end without addressing the root cause: short term resources were allowed to be lent for long term purposes. Development Finance Institutions (DFIs), institutions meant for the flow of infrastructure credit and project lending were wound up. Universal banking was introduced with banks doing more non-banking than banking business. The roots of the malaise are so deep that it reminds me of Shakespeare’s Macbeth: ‘Here is the smell of blood still: All the perfumes of Arabia will not sweeten this little hand.’
His principle itself is at risk with large NPAs, especially to large borrowers.
May be we require a little different type of banks and their administration, supervision and regulation.