Public sector banks have witnessed a systematic destruction of their balance sheets with ever increasing non-performing assets. The problem lies not only with political interference but also political protection
Prime Minister Narendra Modi and Finance Minister Arun Jaitley’s averment about non-interference in bank functioning has been praised, as it should be. It is true that there has been political interference but the banks’ stand that all their woes stem from this problem is not the whole truth.
Bank officials have functioned largely independently. The recent arrest of some senior officials of Syndicate Bank is symptomatic of the disease that has set deep in the entire system. Sometimes, bank officials even welcome political interference.
Public sector banks face the problem of too much discretion. Small depositors are discriminated against and they have to pay many charges and fees. These banks deduct charges on cheques, which they themselves fail to realise. In short, they earn for not being efficient. They raise charges for all their services, without seeking any political clearance.
There are many incidents wherein, despite orders from the political quarters, bank officials have refused to obey. Some political leaders even rue that bank officials come out with excuses for not extending services to their clients. Since there is a new Government now, bank officials, like any other bureaucrat, have been blaming the previous political dispensation. The Prime Minister’s recent meeting with top bankers shows that the NDA Government is keen on course correction.
The public sector banks, however, need to go beyond this. They have silently witnessed a systematic destruction of their balance sheets. Non-performing assets and debt restructuring has increased phenomenally. All of this has happened at a time when there was a supposed economic slowdown. How is it that the banks have started squandering away huge depositsIJ How come the beneficiaries are large companiesIJ Is it also not a fact that during this period of slowdown, fewer consumer loans were givenIJ
All of this speaks of the not-so-responsible manner in which the public sector banks have been functioning. Everyone knows that banks rarely take a risk on orders from even the highest political quarters. One only needs to have common sense to understand how it happened.
In 2009, non-performing assets were pegged at around Rs1.4 lakh crore, almost double the figure from 2006. In 2012-2013, the figure increased to Rs1.55 lakh crore, then in 2013-2014, it went up to Rs2.04 lakh crore and currently it is around Rs2.36 lakh crore. The figures indicate the process in which the banks were milched. Public sector banks apparently forgot that the money did not belong to them and they were mere custodians of what was largely poor man’s money.
These numbers were cited as results of a ‘slowdown’ in the economy. The truth was that public sector banks lent huge amounts of money to large business groups. Till about three decades ago, banks were known for their honesty. However, it has eroded in the era of liberalisation.
The political system certainly did not treat this as a disease. The UPA Government was in denial mode. In 2012, in response to a question in Parliament, on rising non-performing assets, it said, “rising non-performing assets did not necessarily mean any systemic vulnerability”. It was a surprising answer.
Finance Minister Arun Jaitley, while responding to a similar question in Parliament on December 2, 2014, said: “The Government is conscious of the need to restructure public sector banks in India. Various options are being examined with a view to arrive at the most optimal solution which caters to the need for re-capitalisation as well as to make banks more efficient”. This is a major change.
It indicates that public sector banks were having political protection and not interference. Public sector banks officials, it seems, were in league with all those who were keen on eroding them for bolstering the reserves of the unscrupulous.
But taxpayers are no more longer willing to fund for bank inefficiency of the kind that ‘recapitalisation’ denotes. It is double whammy. The depositors get low interest for the benefits of large unworthy borrowers.
This was aptly echoed by Reserve Bank of India Governor Raghuram Rajan recently. He said, “In India, too many large borrowers insist on their divine right to stay in control despite their unwillingness to put in new money. The firm and its workers, along with past bank loans, are hostages in the game of chicken — the promoter threatens to run the enterprise into the ground unless the Government, banks and regulators make the concessions that are necessary to keep it alive”.
The statements of the Prime Minister and the Finance Minister have to go beyond interference. The NDA Government has to build up a system so that not only what has been lost as NPA is realised from the largest borrowers, but also that a protective system for bank funds is put in place. If that requires the creation of a new entity to keep a check on banks, it should be considered with all seriousness.