Govt that boasts of 'good governance' rushing to exit PSU banks, but why?

Public sector banks are not in such deplorable state that they immediately need private sector saviours, argues Arun Sinha

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Picture credit-Social Media
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Arun Sinha

Union Finance Minister Nirmala Sitharaman has put off plans to introduce a bill for privatisation of two public sector banks in the current session of Parliament. That does not mean she has abandoned the idea. The privatisation of the two banks, whose names she has not yet disclosed, is going to happen sooner or later.

But why is the Modi government so keen on privatising public sector banks? There could be two reasons: one, the Prime Minister feels ideologically compelled to create more and more space for private investors; two, he gets some more money to reduce the deficit in his government’s finances. Both are however extraneous reasons with nothing to do with performance.

The public sector banks are not doing so badly that their keys need to be handed over immediately to private redeemers.

Several public sector banks did trip on a number of loan accounts after the economic crisis of 2008. They also had obligations to fund core sector lending unlike private banks. They might have been also guilty of poor judgment. But have private banks not bungled? Have there been no frauds in advancing credit in private banks?

The Yes Bank case is before us. Rana Kapoor, the founder and CEO of the bank was jailed on charges of approving loans to a realty company and receiving a Rs 400-crore worth property at a prime location in Delhi from that company in his wife’s name. This was not the only case. During his tenure the bank sanctioned Rs 30,000 crore, of which Rs 20,000 crore was declared non-performing assets (NPAs) allegedly because the bank flouted all banking norms. Kapoor himself has admitted that he repeatedly appealed to the central government and the RBI to take over the bank “because it is going down”.

Then there is the ICICI Bank case. Chanda Kochhar, when she was the CEO of the bank, was accused of sanctioning a Rs 300-crore loan to the Videocon group and receiving a kickback of Rs 64 crore for a company owned by her husband Deepak Kochhar. It has been alleged that six high value loans worth Rs 1,875 crore were illegally given to Videocon group companies when she was the CEO. Investigations are going on to detect any kickbacks in the sanction of loans to Sterling Biotech Ltd, Bhushan Steel Pvt Ltd and the Jaypee Group during her tenure.

Do cases of Rana Kapoor and Chanda Kochhar point to robust corporate governance in private banks? No, they merely prove that in both private and public banks, such derelictions are possible. Fortunately, the scale of fraud and bungling in Yes Bank and ICICI Bank did not ruin them. But in the cases of two other private banks, the Global Trust Bank and the Laxmi Vilas Bank, pervasive frauds led to their collapse. The apostles of laissez faire such as former NITI Aayog vice-chairman Arvind Panagariya point to high NPAs as proof of “poor corporate governance” in public banks and cites that as a reason why they need to be privatised. The argument does not have legs to stand on.


While it is true that NPAs in public banks were high at the end of 2017, when gross NPAs as percentage of total advances in public banks stood at 13.5%, compared to 3.8% in private banks, it was not solely due to deficiencies in corporate governance. The RBI and the government both learnt from the disastrous “culture of irrational exuberance and leniency” (to use former RBI governor Raghuram Rajan’s phrase). Better governance practices and better risk management systems brought down gross NPAs to 5.9% of the loan advances by March 2022.

The decline in NPAs suggests that better governance is yielding results in public banks. Why then is the central government bent upon handing them over to private investors?

The BJP propaganda machine does not tire of telling us that the nation had never seen as robust governance as under Prime Minister Modi. The propaganda is so successful that his persona has come to be identified with governance that allows no corruption and delivers services efficiently. If that is so, why cannot the Prime Minister improve the governance in public banks?

Good governance in banks means breaking the corrupt nexus between the top management and corporate promoters and stop the bleeding of banks’ finances. It means merit-based appointment of chairmen, managing directors and CEOs. 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 expertise and no political baggage. It means appointment of robust internal and external auditors.

It also means quality board and management. It means the establishing of strong credit risk assessment departments to evaluate the credit history of the loan seekers, to demand adequate collateral security, to detect inflation of credit requirements with over-invoicing, to constantly monitor repayments, to flag defaults and to initiate recovery.

It means that the RBI and government strengthen surveillance and inspections to detect promoters who draw credit from a second bank to pay the loan of the first bank and from a third bank to repay the second bank.

The government has already set up an autonomous body—the Financial Services Institutions Bureau (earlier known as Banks Board Bureau)— to search and select heads of public banks. Therefore, Nirmala Sitharaman’s primary task should be to give FSIB a free hand to choose men of integrity and high professional expertise.

Sitharaman’s second task should be to strengthen the middle order bank management. The industry body, the Indian Bank Association has been inviting consultants for leadership development in public banks. The government must support the banks to get young men and women with management degrees, knowledge of the financial world and technological savviness.

Sitharaman’s third task should be to help the RBI to improve governance in public banks. The RBI has indeed put in place a number of internal and external controls to liquidate the culture of irrational exuberance, leniency and venality.


Raghuram Rajan told a parliamentary panel in 2018: “Too many loans were given to well-connected promoters who had a history of defaulting on their loans…Public sector bankers continued financing promoters even while private sector banks were getting out of financing the said promoters... the diligence done by the banks before and after handing out loans was inadequate.”

To stop all that, the RBI has set up systems to regularly appraise the soundness of the bank’s assets (loan accounts), and to quickly identify areas where corrective action is needed. It has also put systems in place to monitor the capital reserves and the financial factors that can lead to insolvency.

The government will do well therefore to give up the idea of selling off its stakes in public banks and instead ensure robust governance in public banks. That would prove the PM’s governance credentials beyond doubt.

(Arun Sinha is an independent journalist and the author of ‘Against the Few: The Struggles of India’s Rural Poor’. Views are personal)

(This article was first published in National Herald on Sunday.)

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