PNB fraud: Time to privatise public sector banks?

The Rs 11,400-crore PNB fraud has led to calls for privatisation of public sector banks (PSBs) which were reeling under gross non-performing assets worth Rs 7.34 lakh crore by the end of second quarter this fiscal. In order to control the situation, the Cabinet in October 2017 approved a recapitalisation plan for PSBs worth Rs 2.11 lakh crore. This is not the first time PSBs have required capital infusion. Between 2009 and March 2017, approximately Rs 1.5 lakh crore of taxpayers' money was infused into public sector banks in order to keep their books in proper shape.

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So the question arises. Why have these large lenders required capital infusion during regular intervals?

The reason is evident from the Nirav Modi case where PNB has been defrauded off Rs 11,400 crore by taking loans in incorrect manner. Ever since the fraud came to light, other PSBs have also announced exposure to the bad loans which will lead to a strain on their book of accounts, thereby reducing their profitability.

The fraud has led to calls for privatisation of public sector banks. Chief economic advisor Arvind Subramanian has advocated for more private participation in public sector banks. Industry body FICCI too has said the government should consider privatising public sector banks (PSBs) as over Rs 2.6 lakh crore capital infusion in the past eleven years has had limited impact in improving their health, and the move would also reduce drain on the exchequer.

Disbursing loans to friendly industrial houses/companies has always been a practice that has been followed by all political parties in power. Public sector banks have been the channels through which governments have opted to grant loans to industrial houses/companies close to them. Subsequently, the inability to pay the amount by some of these players has led to mounting of bad loans in the books of public sector banks.  

So will the government losing majority stake (51%) in PSBs lead to the reduction in NPAs?

Let's find out.

Welfare schemes

Public sector banks have become a channel for subsequent governments to extend benefits of their welfare schemes to the people. A recent example of the same is the opening of nearly 30 crore Jan Dhan accounts in PSBs for the purpose of financial inclusion. Privatisation of public sector banks will close this route for disbursing funds for welfare of the people.

Development agenda

Every year, the government announces in its Budget funds to be allocated for the overall development of economy. The government losing control over public sector banks will lead to the drying of pipeline of funds to different sectors for economic growth.

Risky private banks loans

The RBI came out with its list of 40 defaulter firms in two phases last year who are accountable for Rs 2 lakh crore of bad loans. Among the lenders who have taken the hit are private sector banks too. That also means not all loans granted by public sector banks go bad. There are private sector banks too which have followed public sector banks off late.  

Bad loans pile up for private lenders

The RBI in its half yearly financial stability report in December 2017 observed while NPAs of the public sector banks increased by 17 per cent on year-on-year basis in September, the rate of increase was 40.8 per cent in the case of private sector banks during the same period. It can be noted that all the top private sector lenders, including ICICI Bank, Axis Bank and Yes Bank, and even HDFC Bank, have been found to have under-reported their dud assets in the recent RBI supervision, results of which were recognised over the first two quarters of the fiscal, it said.

Big private banks like Axis Bank and ICICI Bank have shown sudden increase in NPA after 2015 on the lines of public sector banks. Hence, privatisation of PSBs is certainly not the only solution to the bad loans problem plaguing the banking system.