The newspapers and news channels have gone to town about the Punjab National Bank fraud with a potential loss of over 12k crores and counting; these are large numbers by any standard. The debate has veered towards taking political sides and somehow blaming the Reserve Bank of India, the Congress and or the NDA depending who is writing or talking on the news.
Unfortunately the debate has not focused on the real issues. To me there are only two:
First, why are PSU Banks more prone to frauds and unpleasant financial surprises?
And second, will a change in ownership of these Banks or privatization resolve this issue once and for all? Historically two events have shaped the Banking Industry in India.
The nationalization of banks in India in 1969 which led to the evolution of the Public Sector Banking, and the 1991 liberalization leading to the opening of Private Banks in India.
PSU Banks currently provide approximately 70% of the credit in the country, while the private banks provide the rest.
Meanwhile, Private Banks in three decades have attained size, built strong technology infrastructure, have established a workable credit culture, have built capable and durable management bench strength, and have made and learnt from their mistakes in delivering credit.
Their CASA ratios are good and their ability to manage their NPA’s have been well demonstrated. The Private Banks that did not do this well have closed down or have merged with the stronger private banks. Altogether a logical growth story.
The PSU Banks have not had a smooth ride and can be classified in two broad categories: the three large Banks who have been able to demonstrate a slightly better credit culture, have raised funding to meet their capital adequacy requirements, and have been profitable.
They now are grappling with high NPAs and have the management to work their way through the current crisis. The large PNB fraud has brought to the fore some of their management inadequacies and we can only wait to see their response to the current crisis which will provide a good indication as to their capacity to self correct and survive.
Their largest shareholder, the Government of India will need to demonstrate continued support in terms of equity infusion for these Banks to stabilize.
The remaining PSU Banks face an existential threat. They have extremely high NPA’s resulting from a compromised management, inadequate credit analysis capability, poor operational controls and a management which has got compromised over the years influenced by external pressures. With this as as their heritage survival in the present state is going to be difficult.
Finding a Workable Solution
Given the relatively bleak scenario in terms of credit delivery, how do we ensure that Indian industry gets the credit that it needs to grow?
● We must get over our fixation of PSU Banks and let them either be privatized or allow them to die in an orderly manner. They are unlikely to be the change agents who will provide credit to propel our industry. Two or three of the largest PSU Banks may be able to attract capital and grow. For these handful of Banks, we should have a clear disinvestment plan which enables this effort.
For the remaining PSU Banks we must prohibit them from lending, focus them on cleaning up their NPA’s and encourage them to sell whatever assets they can. These Banks will have to be nudged to closure over a period of time during which their only reason of existence will be to clean up the mess that they have created.
● Large Private Banks will automatically step into the space and expand their lending. They are well-positioned to do so. The large market opportunity presented as the PSU Banks retreat and Private Banks take over the credit delivery role will be large and it is reasonable to expect that even the well-run mid-sized Banks will be able to attract the capital required to aggressively grow.
● Large NBFC’s also will step in to provide credit to the customers that are not obtaining credit from Banks. The ecosystem of NBFC’s is well-established and has survived the numerous business cycles and will scale up very rapidly.
● Large Corporates with good credit history have gone out to the capital markets frequently for their long term and working capital requirements. I see this trend becoming more significant.
● Digital NBFC’s, Banks, and Payment Banks will also change the landscape and provide more niche services as they attain size.
Going ahead the financial framework also has to ensure that there is one effective regulator for the Banks. Logically, the Reserve Bank of India (RBI) is this regulator. Currently, ambiguity exists as the PSU Banks also have dual reporting to the Ministry of Finance.
If we are to have effective governance of the banking industry, it is essential that the entire regulatory responsibility for Banking be vested with the RBI without any interference of the Government.
It is time for India to let go of its public sector banks.
The larger public sector banks should be privatized and sold at the earliest to obtain a decent market valuation. Funds received here should be utilized to capitalize the other public sector banks to ensure that they are able to absorb all the losses that they have to incur as the NPA’s go through the resolution process and have to be written off.
The other public sector banks should be restricted from lending, their healthy customers given a chance to find alternative borrowing arrangements and over a period of time closed as operating lending entities.
The private sector banks, NBFC’s and other Fintech start-ups will be happy to take on the onus of meeting the credit requirements of the country. We will also have a healthier financial services sector which will partner industry to provide the growth impetus required.
About the Author
Tushar Kanti Chopra is the founder Chairman of ATS Services Private Ltd, and has been a banker with Citibank and Bank of America for over two decades.