Investment in India has collapsed due to the huge build up of PSU bank NPAs.
With most Indians today possessing a bank account and large amounts of credit flowing to sectors like agriculture or groups like MSMEs, it is easy to declare that Indira Gandhi’s bank nationalization fifty years ago this Friday has served India well; that, had it not been for PSU banks, none of this would have happened. Around 80% of the Jan Dhan accounts opened for the poor by prime minister Narendra Modi were opened by PSU banks and while 68% of priority sector lending – to agriculture and MSMEs – has been made by PSU banks, just 26% was lent by private banks. Proving this was a folly is difficult since it isn’t possible to go back in time and create a counterfactual, but certainly NBFCs exist in lending to MSMEs and other under-served parts of the population and they have made reasonable inroads there; NBFCs served this population because they could charge higher rates of interest and it is reasonable to assume that, were the government not to put curbs on interest rates, private sector banks would have lent more.
Similarly, while there is no doubt PSU banks have done much better in creating Jan Dhan accounts than their private sector counterparts, this would have been different had the government either paid banks for creating these banks or guaranteed enough incomes from them in the way Modi did when he promised to give the poor money each month via the DBT scheme; the same PSU banks, keep in mind, opened millions of ‘no-frills’ accounts under government direction in the past, but few were serviced for a sustained period since the accounts had no money in them. In the case of rural telephony, where it was always assumed that it was the public sector BSNL which would provide phones – and not private firms like Airtel or Vodafone – the fact is that the private firms overtook BSNL several years ago. In the airline space, it is not Air India but airlines like Indigo that are allowing middle class Indians to fly; and this is despite the Rs 32,809 crore of support given to it by the government since FY10; indeed, in a year where Jet Airways was cancelling flights in the run-up to shutting operations, Air India’s losses were Rs 7,365 crore, up 38% since FY18 and its net debt rose to Rs 58,352 crore, up 6% over the year. And how many people ride a Scooters India two-wheeler today? Wherever the private sector was allowed it, it has done a better job, why should banking be any different?
Indeed, despite the heavy cost borne by the taxpayers – PSU banks lost Rs 2.97 lakh crore of value since Modi first came to power in May 2014 as their share of banking market-cap fell from 40% to 26% – PSU banks are today unable to continue their growth; in the March 2019 quarter, their loans grew just 9.6% versus 21% for private banks and their deposits grew 6.5% versus 17.5% for private banks. An equally specious argument is that, while private banks didn’t lend to Indian industry, especially to infrastructure, the public sector banks did. Apart from the likelihood that private banks would probably have lent if interest rates were higher, surely the massive build-up of NPAs makes it clear that private banks judged risk better; in March 2019, 12.6% of all PSU lending had turned NPA versus just 3.7% for private banks; indeed, the near hollowing out of bank balance sheets – the first of the twin balance sheet crisis – has played a major role in India’s investment crisis. While the taxpayer-funded bailout will help PSU banks lend at a faster pace, what is worrying is that no politician over the years has dared to repair the damage done by Indira Gandhi, not even someone from the economic right like Modi. The way chosen, of allowing PSU banks to shrink in relative terms appears less painful than undoing bank nationalization – actually, re-privatisation – but given the loss in market-cap of these banks, that is an unforgivable destruction of public wealth.