There is no rational, economic reason why banks should be in the public sector
The justification of bank nationalization revolves around supposed goodness of state control over big money, concern for the poor, financial inclusion, and other nice things. It’s time the rhetoric and the romance about state-run banks were thoroughly scrutinized.
Nationalization of banks, or any other company, translates into the control of the key sector passing into the hands of netas and babus, thus increasing the chances of abuse and corruption by a million times
First and foremost, we must dissect the very concept of nationalization. On the face of it, it sounds laudable; the nation, rather than a bunch of fat cats, must control a most important aspect of the economy. Isn’t this the way it ought to be? Why should greedy, immoral capitalists own banks? It is bad enough that they own corporations elsewhere; their control over banking can be disastrous, leading to more concentration of wealth in the hands of a few. Ergo, banks should be nationally controlled.
Quite apart from the philosophical and moral aspects of this socialism-friendly line of thinking, there are practical issues involved here. For in practice nation boils down to the government, and any government is run by politicians and bureaucrats. Now, these two sections of the society are also universally (and rightly) regarded as venal, parasitical, and worse. So, nationalization of banks, or any other company, translates into the control of the key sector passing into the hands of netas and babus, thus increasing the chances of abuse and corruption by a million times. For, in effect, P. Chidambaram, Arun Jaitley, A. Raja, etc., are the nation.
This is not the just libertarian theory which propounds that the business of government is not business; cronyism, political intervention, and bureaucratic bungling in banking have happened in India with frightening frequency and intensity ever since Indira Gandhi brought the biggest banks under government control in 1969. This is evident from the performance of public sector banks (PSBs). While the return on equity (ROE) of PSBs was –2.8 percent in 2016-17, in the case of private banks it was 12 percent. The gross non-performing assets (NPAs) of PSBs stood on September 30, 2017, at Rs 733,974 crore and of private banks at Rs 102,808 crore. Gross NPA ratio of 12 private banks, though it rose from 3.5 percent in September 2016 to 4.3 percent in September 2017, was much lower than that of public sector NPAs. Public sector NPAs was 13.69 percent in the June 2017.
Another reason PSBs should be privatized is that nobody has a personal stake in them. For instance, if IndusInd Bank goes bust, the promoters, the Hindujas, suffer; but if a PSB goes down, the chairman and the top brass don’t.
It is argued that if PSBs are sick, the sickness should be cured. There is no point in privatizing them, for you don’t throw the baby out with the bathwater. But what do you do if the baby is evil, with satanic omens like ‘666’ inscribed all over it? Remember Gregory Peck-starred Omen? PSBs are evil, guzzling taxpayer money, supporting crooked businessmen, and fattening corrupt politicians and bureaucrats.
The rest have to do with the Reserve Bank of India’s creations—business correspondents
Another big reason offered is that nationalized banks provide credit access in villages. Bank branches in rural areas went up from 8,261 in 1969 to 65,521 at the turn of the century. Since then, the number almost doubled to 126,337 in 2015. Isn’t it impressive? Would profit-hungry private bankers have done that?
All this is hogwash, for if private banks opened over eight thousand branches till 1969, there is no reason to believe that they won’t have set up much more since then. We should not forget that the private sector does any job better than the public sector. It was, for example, the entry of private companies has revolutionized the telecom sector. Not long ago, the telephone was a privilege; now even the poor have phones.
Second, there is the issue of the quality of credit access. India’s rank on the indicator of branches of commercial banks per 100,000 adults is 89 out of 167 countries. And even there, it is the better off sections of villages that enjoy banking facilities. The rest have to do with the Reserve Bank of India’s creations—business correspondents. They have been rightly termed as ‘barefoot bankers.’
Third, it is fallacious to assume that if the government doesn’t offer banking facilities to the poor or villagers, they won’t get them. The fact is that the poor and villagers use thousands of goods and services, most of which are provided by private players, be it of the local plumber, electrician, grocer, or doctor. Why should private enterprise offer all goods and services in every part of the country except banking?
In a nutshell, there is no rational, economic reason why banks should be in the public sector. As there was no rational, economic reason for the nationalization of banks about half-a-century ago.
1. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.