Merger of banks to form big banks, privatization of public sector banks will not make banking inclusive

By Sudhansu R Das

Over decades public sector banks have become the happy hunting ground for the fraudsters and willful defaulters. After 2008 when the Lehman’s Brothers’ bank collapsed in the USA under the weight of bad loans, recession gripped the global financial sector. That time, the Indian Public Sector Banks were not affected by this financial disaster because they were not integrated with the global financial system. The NPA in the public sector banks was hovering around 3 to 3.5 % until 2013 which was safe for the banks. After 2014, they opened the loan gate to global companies, Indian companies and high profile individuals. Many of them duped banks, transferred bank loans to foreign accounts; many fraudsters and willful defaulters left the country as if they were going for a honeymoon. The NPAs of banks reached an alarming 10.4% by December 2017. Bad loans continued to pile up in the last four years which have practical and credible solutions.

Bank recapitalization, merger, formation of big banks, Asset Reconstruction Companies, formation of bad banks, loan waivers and one time settlement of loan etc can shine the bank’s balance sheet for the time being but they can’t build the banks’ core strength.

Over decades the union government has recapitalized the public sector banks a number of times in order to keep the banks’ loaning operation active. If banks do not lend, the economic activities will not pick up and the growth will suffer. In practice, it seldom happens. Willful defaulters and fraudsters continue to push the banks into NPA trap even after recapitalization.  The country’s largest number of bank frauds originates in Hyderabad where fraudsters continuously innovate ingenious means to loot banks; they siphon away thousands of crores of rupees from the banks every year. 

Recapitalization and formation of bad banks to resolve NPAs will work better if willful defaulters and fraudsters are given exemplary punishment; a strong law is needed to attach their property created even before the loans are sanctioned.    Recently, the Enforcement Authority could not attach the property of one fraudster in Hyderabad due to a court ruling which read the property before the sanction of loan cannot be attached. Frauds in banks ruin the future of millions of innocent depositors; it kills entrepreneurship, triggers unrest in society and gives mental and physical sufferings to innocent people. The fraudsters should be declared as financial terrorists as their activities drain taxpayers’ money and retard economic growth. 

Efficient bank board, loan committees, internal checks and control, strict monitoring of loan and its end use, dedicated loan appraisal, proper documentation, audit accuracy, proper supervision, political non interference in the loaning operation of banks, an inclusive promotion policy and an efficient human resources management etc can always make public sector banks strong. Accountability should be fixed on top people who should not find scapegoats at the lower level.

Merger of banks to form big banks and privatization of public sector banks will not make banking inclusive. Banks are made to give loan and deposit products to crores of Indians with different social and economic backgrounds. Though formation of big banks will facilitate lending to big borrowers, there is no guarantee that the borrowers would not become willful defaulters and the big banks won’t collapse.  If big banks collapse under bad loans, the financial calamity will be too huge to tackle. Both big and small banks should co-exist in India in view of different types of client base. Well monitored and supervised PSBs are good for the millions of poor and underprivileged people and small borrowers; the private banks are good for educated and techno savvy big borrowers and depositors in cities.  Both should evolve an advanced mechanism to safeguard depositors’ present and future interest.

Formation of bad banks and asset reconstruction companies help banks cleanse their balance sheet for the time being. In the process, the banks lose money as the hard core willful defaulters only repay a small percentage of loans; they are backed by professional legal advisers and chartered accountants who know the loopholes in banks.   One time settlement, waivers and resolving NPA through bad banks are temporary solutions.  This is high time to leave banks alone to decide their own course. They are capable of self reform; political interference should be limited to punish willful defaulters and fraudsters only.  

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