With most Indians today possessing a bank account and large amounts of credit flowing to groups like farmers or MSMEs, it is easy to declare that Indira Gandhi’s bank nationalisation 50 years ago this Friday has served India well. Around 80% of the Jan Dhan accounts opened for the poor by prime minister Narendra Modi were, for instance, with PSU banks and, while 68% of priority sector lending has been made by PSU banks, just 26% was done 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 privately-run NBFCs lend a lot to MSMEs and other under-served parts of the population; 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 to these segments as well. To the extent the government wanted the loans to be low-cost, it could have paid the subsidy directly to the borrowers.
While there is no doubt PSU banks have done better in creating Jan Dhan accounts than their private sector counterparts, things would have been different had the government either paid banks for servicing these accounts 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 in the past, but few of these were serviced over a sustained period since the accounts had no money in them. In the case of rural telephony, by way of example, 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 (AI), but airlines like Indigo that are allowing middle class Indians to fly, despite Rs 32,809 crore of cash given to AI since FY10; indeed, in a year where Jet Airways was cancelling flights in the run-up to shutting operations, AI’s losses rose 38% to Rs 7,365 crore in FY19 and its net debt rose 6% to Rs 58,352 crore. Wherever the private sector was allowed, it has done a better job.
PSU banks, keep in mind, lost Rs 2.97 lakh crore of value since even when Modi first came to power in May 2014, as their share of banking market-cap fell from 40% to 26%. And they are today so cash-strapped due to a rapid build-up of bad loans, they are 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, PSU banks did.
Apart from the fact that private banks didn’t have the same access to (taxpayer-funded) free cash as PSU banks have had for decades, surely the massive build-up of NPAs makes it clear that private banks judged risk better; this same free cash, in the case of AI, is what allowed it to charge low fares and led most to believe it was a more pro-consumer airline. 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 PSU bank balance sheets has played a major role in India’s current 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 nationalisation, but given the loss in market-cap of these banks, that is an unforgivable destruction of public wealth.