Bank privatization is not the only answer

The All India Bank Employees Association (AIBEA) has called for a nationwide two-day bank strike on February 23-24, 2022. The year 2021 also ended with a massive strike by banking unions across India on December 16 and 17. The banking system is the lifeline of any economy and banks are the depositories of public money. Depositors therefore have a greater interest in the welfare of banks than shareholders. The failure of a bank has more systemic implications than, for example, the failure of a manufacturing company. The Indian banking sector has become one of the major drivers of India’s economic growth. According to a report by PwC, India could well be the third largest banking center in the world by 2040, and by 2025 the Indian fintech market is expected to reach 6.2 trillion rupees.

The central government may soon introduce amendments to the Banking Regulation Act 1949. banks, the minimum state ownership in public sector banks (PSBs) has been reduced from 51% to 26%.

The Modi government had also started working on the ambitious bank consolidation plan since 2017. In that year, there were 27 PSBs in the country. But as of April 1, 2020, there are only 12 PSBs left in the country. In the long term, the government plans to create fewer but larger and more efficient PSBs. However, at the same time, ordinary people’s deposits in private banks have increased from 17% to 29% in recent years.

Need for structural reforms

The biggest challenge for banks right now is non-performing assets (NPA). But it is unfair to present a solution only by promoting privatization. Instead of privatizing PSOs, long-term structural reforms are needed. Private sector banks have been repeatedly arrested for wrongdoing for providing questionable loans; several have been found guilty of under-reporting PMAs. The service charges of these banks are also high and they refrain from providing services in rural areas. They are also reluctant to implement government programs.

After the formation of the Reserve Bank of India in 1935, 900 private banks went bankrupt in our country till the period of independence (1947). From 1947 to 1969, 665 private banks went bankrupt. Even after 1969, 36 banks failed but were saved by merging with other public sector banks.

Some of the money can be collected through divestment, but it would be wrong to think that it is a medicine for all diseases. It is time to take important and concrete measures. Cash flow continuity is an issue for both the service industry and individuals. The Indian banking sector should use it as credit and start lending to individuals and MSMEs at low interest rates. This will encourage overall economic growth and give banks the opportunity to improve their capital ratio (CAR). Poor asset quality discourages banks from lending more, either because of capital constraints or fear that new loans will deteriorate.

The regulation and supervision of chartered accountants is also very important in reducing bank NPAs. Banks need to be careful when lending to Indian companies that have taken huge foreign loans. The government has made the Insolvency and Bankruptcy Code (IBC) stricter. The only way out of the NPA and deficit trap is to invest more in developing the human resources of PSBs. It is necessary to have appointments of financial, legal and industrial specialists in the banks. Establishing a “bad bank” and quickly resolving NPAs through the Bankruptcy and Insolvency Code would also be a step in the right direction.

There are many opportunities in technology. Technological inclusion and literacy campaigns should be undertaken to ensure the dematerialization of banking operations.

Focus on MSMEs, innovation

The banking sector mostly ignores the advances of MSMEs, which is an unhealthy trend. MSMEs are the backbone of the Indian economy and generate employment for around 8 million people. This sector contributes 16% to India’s GDP, which could reach 25% by 2022.

Innovation is the key to maintaining a long-term relationship with customers. The banking industry needs to invest in innovation to keep pace with the changing environment and other industry practices.

The divestment process began in 1991. The debate over the nationalization and privatization of banks is not new. But the privatization of public enterprises has been a priority for the current government. For 2022, the government has set a target of Rs 1.75 lakh crore as divestment revenue.

What will happen to the public welfare activities of these banks after privatization? Will the new privatized bank still provide such services? Is there a guarantee for this? Opposition to and against privatization goes beyond the concerns of employees and sees it as a gesture that affects the general public.

The author is Associate Professor, Atal Bihari Vajpayee School of Management & Entrepreneurship, Jawaharlal Nehru University (JNU)

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