Nationalisation has made PSU banks houses of patronage. Government must act
The most telling thing about the recent banking scandal involving Nirav Modi and Mehul Choksi, or indeed other banking scandals that involve loan fraud of one sort or another whether it is Vikram Kothari or Vijay Mallya or the myriad of non-performing assets that the Government now intends to sell, is that they almost always involve India’s public-sector banks. Even when there is a consortium of banks involved, it is rare to find and Indian private bank or a foreign bank involved at the scale that India’s nationalised banks are. In fact, all large scams that have been perpetuated in India over the past few decades from Ketan Parekh to Harshad Mehta, have involved a nationalised bank. And every time a scam occurs, commentators wring their hands and talk of the need to reform India’s public-sector banks. But this time there seems to be some seriousness towards reforms. The constant recapitalisation of Indian public-sector banks with taxpayer funds must not and should not be allowed to continue.
This is not just about the Punjab National Bank (PNB). It concerns every public-sector bank large or small; a system wherein political patronage and corruption determined how loans were sanctioned must be changed. For example, would Nirav Modi have received letters of Understanding from PNB had he not had political and business patronageIJ It is highly unlikely. Would Vijay Mallya have been allowed to get away with ‘mortgaging’ the Kingfisher Airlines 'brand', which was effectively worthless, for three thousand crore rupees unless banks were induced into accepting itIJ Again, highly unlikely. While there is little doubt that some of these scams and frauds started during the previous UPA regime, the current government cannot escape part of the blame — for not only acting late but also letting the perpetrators flee the country. From the income-tax paying public to the poor, all sections of Indian society apart from the ultra rich and well-connected are likely to find such slow action unacceptable, especially when in their everyday lives they are punished for failing to pay their bank dues on time. It is strange that there is political jostling over this issue since alleged fraudsters like Nirav Modi and Vijay Mallya were, at their peak, friends to all. It would not be incorrect to say that leaders across political parties partook of their extravagant hospitality.
The only solution to this situation is to not only merge smaller public sector banks into larger units but also to replace the political patronage system that has infiltrated the banks like most other sectors with Government jobs in play. That, in turn, would mean putting in place an immediate plan to gradually privatise public sector banks. This would not only help recoup some of the massive investments made in the banks but also force them to stand on their own two feet because they cannot go to the government everytime their employees manipulate the system to help the likes of Nirav Modi and Mallya. While some private banks also get caught up in frauds occasionally, those instances are rare. India’s private sector banks have given tremendous shareholder returns and excellent profits for two decades while public-sector banks have bled money. Banking, if done following the rules, is not rocket science, but Indian public-sector banks are less banks and more houses of patronage.