Defending everyones whipping boy
MYTHILI BHUSNURMATH
IN TERMS of timing, I couldnt have picked a less opportune moment to stick my neck out on bank nationalisation; the public is still smarting at how nationalised bank employees held them to ransom with their strike earlier this month.
But come to think of it, given its connotations think bank nationalisation and Indira Gandhi and the Emergency immediately come to mind there is, probably, never a good time to defend bank nationalisation.
Earlier this year the Congress president and the FM were both ridiculed when they dared to speak in support of nationalisation. If the UPA chairpersons views were, somewhat charitably, put down to economic naivete, the FMs homage was seen as another instance of his anti-reform mindset.
Clearly 40 years after the event, bank nationalisation is still a bad word (never mind that both the US and the UK have only recently gone down the same path). So at the risk of being branded a revisionist, or, perhaps worse, clubbed with Mrs Sonia Gandhi and the FM, let me make my pitch in defence of public sector banks (PSBs).
Before you dismiss this as some sort of plug for PSBs, consider: in 1969, when banks were nationalised, the population per bank branch was 82,000 in the rural areas and 33,000 in urban areas. By 2007 that number had fallen to 17,000 in rural areas and 13,000 in the urban areas. In 1969, just 17% of the branch network was in rural areas; today that number is 32%, thanks almost entirely to PSBs.
Yes, there is a large section (41%) of the population that is still without access to modern banking. But what is indisputable is that but for PSBs, access to banking, especially in the rural areas, would have been far less (see table). As of March 2008, PSBs had 35% of their branch network in rural areas; the corresponding number for new private sector banks was just 6.3% while in metropolitan areas where business is more lucrative , private sector banks led the way with 36% of their branch network in metros as against 20% for PSBs.
Take another parameter: credit growth. It is widely accepted that the financial crisis in many western economies took a turn for the worse after credit markets froze. As banks took fright and shied away from lending, many borrowers were left high and dry, perpetuating a vicious downward spiral. Hence, part of the solution lay in persuading banks to continue lending, despite the slowdown. It is a different matter that few complied!
In India, too, industry chambers and the government have been shouting from the rooftops about the need for banks to continue lending. But once again it is PSBs that have ridden to the rescue; credit extended by PSBs, growing 20.4% in the year to March 2009 as against just 4% and 11% for foreign and private sector banks respectively. Yes, it is possible that when they expand their portfolios in a slowdown (in the larger interest of the economy at the diktat of the government), they might also see a rise in the level of NPAs. But that is the flip side of their delivering on their larger social responsibility and not necessarily a commentary on their efficiency.
Indeed, as the report of the Committee on Financial Sector Assessment points out, far from being slothful behemoths, PSBs have responded well to the challenge of competition . Not only is there an overall convergence in their financial results with the other banking groups but, surprise, surprise, their share in the overall profit of the banking sector has increased (emphasis added).
Moreover, thanks to their implicit government guarantee, PSBs are instrumental in promoting financial stability. Contrast the irrational fear that overtook depositors of ICICI Bank on rumours that the bank was in trouble with their rock-solid faith in Indian Bank back in the 1990s when despite public knowledge of its precarious financial position , there was no run on the bank.
This is not to say all is hunky-dory with PSBs. It is not! It is rather to point out that if we expect PSBs to heed a larger call promote financial inclusion, drop interest rates at governments behest (even when it does not make commercial sense to do so), lend to weaker sections, open branches in remote areas and so on and so forth, we must also be prepared to put up with the downside of their public ownership, of which strikes are just one manifestation. Poor work ethos, slow decision-making , bureaucratic interference , etc., being the others.
Does that mean we should cave in to the demands of PSB employees regardless, simply because they have more nuisance value than employees of say, a BHEL or SAIL Not at all! It merely means there is a case for public ownership of banks in a country like India in economic parlance, at our stage of development PSBs are a public good . So there is no point in berating them they are what they are because that is what we want them to be. It is far better, then, to give them greater professional and operational autonomy , even as we retain public ownership!
The recent strike by nationalised bank employees has made the public see red Everyone loves to hate public sector banks but they meet a larger social need and contribute greatly to financial stability Its far better to give them greater professional and operational autonomy, even as we retain public ownership
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