Professionalise country’s banks

The money withdrawal restrictions imposed upon the 1.6 million customers of the Mumbai-based Punjab-Maharashtra Cooperative Bank (PMCB) following discovery that the bank’s management has advanced Rs.6,500 crore of its total deposits of Rs.8,880 crore to one borrower, is yet another scam which has shaken the faith of the public in the country’s rickety banking system headed by the Reserve Bank of India and 19 nationalised banks which hold 85 percent of the public’s savings. It’s important to note that the common denominator of these banks is that they are controlled and regulated by the Central government and its obedient RBI.

A second noteworthy point is that balance sheets of public sector banks (PSBs) are awash with NPAs (non-performing assets), the natural outcome of reckless lending practices. The NPAs of India’s nationalised banks average 12-14 percent of total advances cf. the prudent banking norm of 1-2 percent. In sharp contrast, the NPAs of private sector banks average 3-5 percent.

This is the bitter fruit of nationalisation of India’s 14 major private banks by the Central government led by prime minister Indira Gandhi in 1969, not because they were under-performing, but because they were allegedly reluctant to lend to SMEs (small and medium enterprises) and the poor. But after nationalisation, the banking sector has become so opaque and bureaucratic that SMEs and the poor are loath to transact business with them.

Moreover, the straightforward business of bank managements taking deposits and making advances has become very complicated in India because the meddlesome politician-bureaucrat nexus has thrown a spanner in every possible works. Compared to heavily bureaucratic nationalised public sector banks, co-op banks are relatively informal institutions and hence favoured by SME entrepreneurs who don’t have the time for forms filling and protracted negotiations. And because they are ‘scheduled’ (subject to Reserve Bank of India supervision and audit), they inspire public confidence. Quite clearly, the RBI failed in its duty to detect that PMC bank had advanced over Rs.6,500 crore to one client (HDIL, a real estate development company), four times the mandatory cap fixed by RBI, amounting to over 70 percent of the bank’s entire assets.

The huge scams in the country’s banks being unearthed daily are destroying public confidence in the entire banking system and mass withdrawals of deposits can severely damage India’s economic growth prospects. It’s now patently obvious that government clerks with their ponderous bureaucratic institutional management systems and proclivity for corruption can’t manage banks.

Therefore, as has often been argued on this page, the sooner the government privatises nationalised banks and appoints professional bankers rather than bureaucrats to run RBI, the better. Protecting public savings and financing Indian industry are responsibilities too important to be left to bureaucrats and glorified clerks.