How to reform public sector banks

Better governance and better risk management can be brought about in public banks without privatising them

Arun SinhaUpdated: Tuesday, July 26, 2022, 01:30 AM IST
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India’s two prominent economists—Arvind Panagariya, the former vice-chairman of the NITI Aayog vice-chairman and Columbia University professor and Poonam Gupta, the director-general of the National Council of Applied Economic Research (NCAER) and a member of the Prime Minister’s Economic Advisory Council (PMEAC)—have in a policy paper batted for privatisation of all public sector banks, except the State Bank of India. If the government was willing to listen to them, they would even want the SBI to be privatised, they said, but “we recognise that within the Indian economic framework and political ethos (emphasis ours), no government will want to be without a single public sector bank in its portfolio.”

Panagariya and Gupta are apostles of laissez faire, so their advocacy for disinvestment of public sector banks hardly comes as a surprise. If either of them were prime minister of India, they would transfer all national assets to the private sector and shrink the government to skull and crossbones, a lifeless symbol of warning to them not to cross limits. However, as far as their advocacy for bank disinvestment is concerned, their argument stands on extremely infirm legs.

Their first point is: public sector banks are prone to fraud. Our question to them is: will privatisation eliminate chances of fraud? Has there not been fraud in private banks? Arvind Panagariya may please note, we are not talking of the United States—the capital of the Empire of Laissez Faire where he teaches economics, and where massive frauds took place in private financial institutions nearly 15 years ago, frauds that destabilised the global financial system, a destabilisation from which the world is yet to fully recover—but of India. Do we not remember the fraud committed by Rana Kapoor, the founder, MD and CEO of Yes Bank? He was charged and jailed for advancing loans to a realty company and receiving a Rs 400-crore-worth property at a prime location in Delhi from the company in his wife’s name.

Have we forgotten the fraud committed by Chanda Kochhar, the CEO of ICICI Bank? She broke all rules to sanction Rs 300 crore loan to Videocon International Electronics Ltd promoted by Venugopal Dhoot, who then transferred Rs 64 crore to a company called Nupower Renewables Pvt Ltd owned by her husband Deepak Kochhar. And this was not the only case of fraud against Chanda Kochhar. The investigating agencies have discovered corrupt practices in sanction of several other loans during her tenure.

The second point Panagariya and Gupta make is that public sector banks have poor corporate governance. Do the cases of Rana Kapoor and Chanda Kochhar point to robust corporate governance in Yes Bank and ICICI Bank? They actually prove that, as in public sector banks, prudence, diligence and efficiency can go missing in private banks if there is a nexus between the top management of the bank and wicked borrowers. Fortunately, the scale of fraud in Yes Bank and ICICI Bank was not so large as to push them into insolvency. But in two recent cases of private banks, the Global Trust Bank and the Laxmi Vilas Bank, frauds were the norm, leading to their collapse.

It is true that public sector banks had more NPAs (non-performing assets) than private sector banks. As in December 2017, gross NPAs as percentage of total advances in public sector banks stood at 13.5%, while they were 3.8% in private sector banks. The picture we get is that there are NPAs in both public and private banks; only the scale is three times higher in public banks. That calls for better governance and better risk management in public banks. And better governance and better risk management can be brought about in public banks without privatising them. The gross NPAs of public sector banks have already come down to 5.9% by March 2022.

Yet, not just the apostles of laissez faire, but also the Modi government has been talking about privatising public sector banks. While presenting the Union budget for 2021-22, Finance Minister Nirmala Sitharaman announced the government’s decision to privatise two public sector banks. She did not name them. She was expected to introduce a bill regarding that in the current monsoon session of Parliament, but she seems to have deferred it.

Now, Prime Minister Modi’s persona is identified with robust governance, a governance that allows no corruption and efficiently delivers services. If that is so, why cannot his government improve the governance of the public sector banks? How can it be that you run a behemoth of a government efficiently but you cannot run twelve banks efficiently?

After all, good governance in banks means nothing but a set of practices that make it impossible for any corrupt or exuberant manager to oblige any unscrupulous borrower at the cost of the bank’s finances. It means merit-based appointment of chairmen, managing directors and chief executive officers. It means market-compliant salaries, stock options and bonuses to attract the best brains for leadership. It means appointment of directors who have integrity and specialist expertise and no political obligations. It means honest audit.

It means that the quality management establishes strong credit risk assessment departments to evaluate the credit history of the promoter, to demand adequate collateral security, to detect any inflation of credit requirements with over-invoicing, to constantly monitor repayments, to flag a default and to start recovery. It also means that the government strengthens the surveillance and inspections through the RBI to track the graph of major loan accounts (Rs 100 crore and above) in every bank, as also to detect wicked promoters who draw credit from one bank to pay the loan of another bank.

The government has already set up an autonomous body—the Financial Services Institutions Bureau ( earlier known as Banks Board Bureau)—to appoint heads of public sector banks. The industry body, Indian Bank Association is implementing several programmes for leadership development in public sector banks. Learning lessons from frauds, the RBI has put in place severe internal controls in the banks and external controls by itself. Improvement in governance of public sector banks is happening. The Modi government has to facilitate and support it, instead of selling them off.

Arun Sinha is an independent journalist and author

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