53 years of bank nationalisation: Time to bid adieu to public-sector Banks?

The market cap of HDFC Bank alone is more than that of all PSBs put together. But the immense social role played by the PSBs has not been given due recognition.

53 years of bank nationalisation: Time to bid adieu to public-sector Banks?
Now, there is a bank branch for every 9,000 people. (Representational Picture)

By Bikash Narayan Mishra

On this day 53 years ago, 14 private banks were nationalised. Then again in April 1980, six more private banks were nationalised. SBI was brought under the government control earlier in 1955 and its 7 associates in 1960. These 28 public-sector banks (PSBs) had their dominance until 1995 with almost 90 percent market share. The remaining market share was with the private banks.

Then came the tech-savvy new generation private banks following liberalisation of the economy in 1991. Much water has flown under the bridge since then. Now the number of the PSBs has come down from 28 to 12 following a series of mergers and amalgamations. The market share of the PSBs has also come down from 90% to below 60% in the last 30 years. It is likely that out of the 12 PSBs, two are going to change hands in near future, since it has been envisaged in the Union Budget for 2021-22.

A paper co-authored by two noted economists–former Niti Aayog vice-chairman and the NCAER chief—has recommended that all PSBs barring SBI be privatised. It is against this backdrop one needs to introspect whether the PSBs have failed the nation; and/or whether they have underperformed; and whether privatising them will enable them to deliver better and will be in the larger interest of the nation and society.

On the eve of the bank nationalization of 14 banks in July 1969 (out of which 4 have been merged so far), we had only 8,000 bank branches in the country and there was one bank branch for 65,000 people. Only 5,000 of the 6,38,000 villages had bank branches, including a cooperative bank branch. Now, there is a bank branch for every 9,000 people. Besides, there are ATMs, other service outlets, banking correspondents and, of course, the pay phones and a plethora of other digital devices. Domestic credit to private sector, as % of GDP, was below 10% before nationalization; this has gone up to 55% now.

The performance of a bank, especially a commercial bank, is agnostic to the ownership. PSBs might have underperformed their private peers in some aspects; but as far as governance challenges are concerned, it is not just the PSBs that have provided causes for concern. Private banks, too, have had serious issues at regular intervals and the government and the regulator had to come to their rescue. 

The reasons for the proposed privatisation emanate from the fact that PSBs have underperformed in the areas of asset quality, returns on equity/dividend payments and the valuation aspects. Of course, the PSBs need to pay heed to some of the harsh realities. The market capitalisation of private banks stands at more than Rs 21 trillion, compared with less than Rs 7 trillion for all PSBs put together. HDFC Bank alone has a market capitalisation of over Rs 7 trillion, which is higher than the market size of all the PSBs. Besides SBI accounts for more than 60% of the market share of all PSBs. In terms of business numbers, what HDFC bank has done in less than 30 years, the PSBs have not been able to do in 100 years. HDFC Bank has a business of Rs 29 trillion, next only to SBI with Rs 69 trillion as of March 2022. The gaps are also visible when we look at the earning numbers; the top 12 private-sector banks (PVBs) have ended with more than Rs 95,700 crore in profit, which is more than 150% of all the PSBs put together.

These are all hard facts. But one must have a holistic view on this critical issue. The immense social role played by the PSBs has not been given due recognition. When the companies are talking about Environmental Social Governance (ESG), the PSBs have been doing this for more than half a century now. We need not go back too far to appreciate how the PSBs have been contributing towards nation-building. Under the Jan Dhan Yojana mooted by Prime Minister Narendra Modi, which was launched in August 2014, more than 44 crore no-frills accounts (55% of which belong to women) have been opened and there is a credit balance of over Rs 1.30 trillion in these accounts. This has revolutionised our direct benefit transfer schemes, which have plugged leakages and resulted in substantial savings for the government as well while helping the intended beneficiaries. Through these accounts, the government could swiftly transfer assistance to 20 crore women beneficiaries in the aftermath of the pandemic. Even the developed countries couldn’t transfer assistance at such a speed. And as per the government data, as many as 98% of these accounts were opened by the state-run banks. 

During demonetisation, the PSB branches rose to the occasion and served their customers/general public, working for long hours, often late into night. During the pandemic, most of the PSB branches extended normal banking services notwithstanding the associated risks to the lives of their staff. Thousands of employees, including very young ones, were infected and could not survive.

This reminds one of the famous case studies of Harvard Business School on the 26/11 terrorist attack on Taj Hotel in Mumbai. At the time of the attack, there were 1,700 people in the hotel, including 600 staff members. As many as 34 people were killed, about half of them were the employees of the hotel–mostly youth in their early 20s. All the employees knew the escape routes of the hotel; but they chose not to flee. They remained there to help their customers escape. On being asked about this, Ratan Tata said they were never given any such training not to escape in such situation. But they chose to do their duty voluntarily. Taj group’s policy is to catch people young from tier 2 and tier 3 cities. They were chosen because of their attitudes and not because of high grades. And most of them were from lower-middle class families.

Taj’s staff strength will be very small in comparison to the nearly one million employees in PSBs. But during crisis or matters of national importance, PSB staff always rise to the occasion. We need such self-motivated employees in front lines of bank branches, especially in rural areas, where 65% of our people live. In fact, India has little over 53,000 branches spread across more than 6,38,000 villages. So, one bank branch is serving 12-odd villages. It has taken more than 70 years for migration of little over 20% of population from villages to cities.  We need more bank branches in villages; be that of state-run banks or private banks. The private banks have a little over 7,500 branches in rural India, which is less than that of SBI’s alone. Of course, in the past 2/3 years, the private banks have opened more rural branches than the PSBs. Still, the gap is huge.

We are a society in transition. There is a need for coexistence. As such, the number of banks (public and private) in India pales in comparison to that in the US or China. The private banks have played a great role in bringing about speed and accuracy in the delivery system, fostering competition and the technological/digital disruptions. This forced the PSBs to embark on a path of reforms. The tax-payer’s money must be saved for more pressing developmental works.

The government is already carrying out a lot of reforms in the PSBs, including the EASE reforms–which are now in the 5th year. This has resulted in positive results. All the PSBs were in profit as on March 2022 and there has been perceptible improvement in their asset quality, too. It is time right people are placed at right places in the nationalised banks for better results and to carry out more reforms, instead of privatising them.

(The author is Senior Advisor to the Indian Banks’ Association. The views expressed are personal)

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