Bank nationalisation and beyond

On its 50th anniversary, here is a critical look into what public sector banks have achieved and what needs to be done to go forward

By Author  |  B Sambamurthy  |  Published: 21st Jul 2019  12:02 amUpdated: 20th Jul 2019  10:39 pm
Bank nationalisation

Five decades have gone by since 14 banks were nationalised on July 20, 1969. This significant decision contributed in a big way to the soaring political temperature at that time. Indira Gandhi broke away from the Congress old guard, known as the Syndicate, and this provided the political backdrop for nationalisation.

Nationalisation was intended as a major initiative of socio-economic change. This step also marked the victory of Centre-Left politics over Centre-Right sections of the ruling party. The legendary free market advocate, Nani Palkhivala, bitterly fought the decision of nationalisation but lost in the highest court of the land.

There were about one million borrower accounts before nationalisation. Between 1961 and 1968, there was hardly any increase in the number of borrower accounts. Instead, during this seven-year period, there was a decline of 14,000 accounts (DN Ghosh, Economic and Political Weekly), pointing to the concentration of economic power.

With no capital norms like Basel, the capital deployed by the business houses that owned these banks was minuscule. Banks were accustomed to lend to medium and large industries, which took away two-thirds of the total credit of the banking system, though this segment contributed to hardly 10% of the net domestic product (SL Shetty). A number of private banks also failed in the early 60s.

Nationalisation of banks in 1969 succeeded in social control of banks, laid down a year earlier. There were several explicitly stated and implied objectives of nationalisation. Socio-political objectives included eliminating concentration of economic power, controlling the commanding heights of the economy and using the banking system for the developmental needs of the economy.

Bank nationalisation
Indira Gandhi, then Prime Minister, nationalised 14 commercial banks through an Ordinance on July 19, 1969.

Politics apart, it was difficult at that time to brush aside the broader socio-economic objectives of nationalisation. Chief among the stated objectives included:

• Spreading branch network widely and across the country, particularly in rural and semi-urban areas

• Larger mobilisation of savings much needed for investment and to accelerate development

• Redirecting credit deployment more towards agriculture, small industries and weaker sections of society

The PSU banks have helped achieve these objectives (see infographics). But soon fatigue set in and owing to the large number of non-viable branches, consolidation of rural branches began.

Bank nationalisation Unique Challenges
Where did the problem lie? The adoption of technology was slow till a few years ago, due to, among other things, lack of adequate skills and trade union resistance on misplaced fears of job losses. This led to a drop in efficiency, productivity and increase in costs leading to non-viability of branches, particularly in rural and semi-urban areas.

Secondly, the misconceived loan melas by the then political establishment, impaired credit culture. But if one looks at the NPA composition now, it is the big corporate accounts that have inflicted heavy damage on the banks.

PSU banks responded by reducing staff strength through one of the largest Voluntary Retirement Schemes during 2000-01. They also started embracing technology, albeit slowly from 1984 onwards, starting with Ledger Posting Machines and progressing to Core Banking Solutions.

Where PSU Banks Score
The PSU banks took the lead in popularising highly innovative self-help groups through group lending. It was a significant success for some years. A good credit culture with a high repayment capacity of over 98% was achieved till politics took over.

Even today, banks lend to microfinance institutions and NBFCs in excess of Rs 7 lakh crore which on-lend to homeowners and other priority sectors. Recently, when the NBFCs faced serious liquidity and distress, it’s the PSU banks which helped by providing liquidity in many cases.

Another recent achievement is the opening of Jan Dhan accounts. Of the total accounts, over 97% was opened by the PSU banks (see infographics). This enabled government to do DBT transfers and save over Rs 1 lakh crore.

Too Many Blind Spots in Infra Financing
The biggest setback for PSU banks (not something unique to PSUs) has been the heavy damage inflicted by infrastructure financing. As a part of liberalisation, the infrastructure sector, which was earlier run by the government as public good/utility, was thrown open to private sector development and operation. None of the stakeholders, entrepreneurs, policy makers, regulators, analysts and lenders adequately understood the risks. But the numbers were mouth-watering. There was a gold rush and lenders rushed in, goaded by the owners and nodded by regulators.

The poor performance of auditors and rating agencies only added to the woes. It was a shot in the dark and infra lenders suffered heavy blows, particularly the PSU banks of all sizes and shapes. There is no evidence even now (sound bites in media is no evidence) that all the stakeholders adequately understand risks and blind spots and have put in place mechanism to mitigate the risks. As feared by the Chief Economic Adviser, there are serious efforts to privatise profits and socialise losses. This needs to be corrected as the government is embarking upon a Rs 100-lakh crore infra investment.

Why PSU Banks Lag Behind

Human Resources
There is no dearth of critics of PSU banks. Where do the problems lie? While not absolving the banks of poor performance culture, there were certain things beyond their control. For instance, banks have little freedom in the entire HR lifecycle right from recruitment numbers, methods and sources, talent acquisition/management, compensation structure, specialisation, promotion and even deployment. The government’s ban on recruitment for a number of years created huge shortages and they were filled in bunches, leaving little or no time for knowledge transfer.

The board’s freedom is limited to adopting government circulars. Indira Gandhi promised on the floor of the House that banks will have full autonomy and the boards will have full powers. There were several committees since then which echoed similar recommendations. But the changes are too small and too slow.

Unless HR shackles are removed, boards are fully empowered and they are comparable with well-run private sector banks, no amount of palliatives will help. Many bright officers of PSU banks have left in frustration and joined private sector banks (in fact, they helped private sector in the initial years) and even to date are doing extremely well.

Leadership Development
When in doubt, senior officers are packed off to IIMs for fast tracking leadership development, forgetting that leadership development takes place in the crucible of lifetime experiences and not in the classroom. Ambition, integrity and competency are the critical ingredients of leadership. The former two are practised through imbibing bedtime grandmother stories every night and there is no expiry date. Competence can be learnt in the classroom.

Capital Management
Secondly, governments have a habit of providing only compliance capital and not growth capital periodically and front ended. Look at the private sector — they regularly tap growth capital. When PSU banks have strong balance sheets and enjoy reasonably good valuations, they are not allowed to tap capital from the markets, which would have reduced the burden on the government. It makes no sense to hit the capital markets, when banks are in dire need and their balance sheets are fragile. Obviously, there will be no takers. This needs to be corrected.

Privatisation Hesitancy
Should the PSU banks be privatised? In fact, many a time PSU banks are asked to rescue troubled private sector banks through costly absorption. If PSU banks have not lived up to the expectations, why do successive governments of all hues not privitise them? Why is only consolidation by merger of PSU banks resorted to instead of privatisation?
Maybe the establishment of day finds good use of PSU banks, especially in areas that the private sector is reluctant to, implement government schemes. Jan Dhan is a classic example. One needs as much political will to privatise as to nationalise. Even the blue-eyed boy of the markets, Dr Raghuram Rajan, in a recent interview backtracked on privatisation. Maybe he is a little disappointed at the poor performance, governance and risk management, at the marquee private banks.

Status Quo is Suboptimal
What are the potential choices? It is unrealistic to assume that any government can do total privatisation. On the other hand, status quo is the suboptimal option. Creation of three-four big banks through mergers, privatisation of two/three banks in the first round, retention of 25% stake or golden share option for three/four banks can be a mix of the solutions.

But till such time, give autonomy to PSU banks boards (50-year-old promise) on HR lifecycle, capital management; give at least five-year tenure to MD and CEOs. Let the board decide its composition as any listed company does with an external evaluation after 2/3 years.

In any case, do not task PSU banks again to do the bidding for filling gaps in infra financing. Redesign financial architecture and PSU banks’ place in the same. This is urgent as the government has announced Rs 100 lakh crore investments for infrastructure development in the recent Budget.

Passion and crusader instincts were dominant in the first decade of nationalisation. They are hard to find now. Bank boards and senior management need to do serious introspection from a futuristic perspective rather than indulge in mutual blame games. The focus must be on improving performance and public image.

Like human beings, every institutional structure, not excluding public sector banking, has an expiry date. But it is not explicitly written. It needs pragmatism and courage to find out well before the due date and act. China adapted and USSR refused to adapt and imploded. Red Capitalism of China helped them reduce poverty and become a global economic powerhouse.

(The author is former CMD of Corporation Bank and Director & CEO of IDRBT; [email protected])