In 1969, 14 banks were nationalized by former Prime Minister Indira Gandhi. The argument was that the banking sector was not working rapidly enough in spreading credit availability across the state.
The then Finance Minister Morarji Desai was not in favour of the same and denied to consider the proposal. However, on July 19, 1969, the banking companies converted to the public sector banks being transferred to the state and again in 1980, six more banks were nationalized. In 1955, Imperial Bank was converted to State Bank of India. With 27 nationalized banks, the government has control over almost 70-75% of the wealth deposit.
With the help of RBI, govt. can make the decision regarding these national banks like recruitment processes, recapitalisation, loan rates etc.
There is a question mark on the sustainability of country’s banking system.
According to the Finance Stability Report released on June 30, 2017, RBI gave an indication that the sector is under severe stress, with the problem of bad loans and bank frauds, among other issues.
In a recent report by CARE rating, India has been ranked fifth on the list of countries with highest Non-performing Assets(NPA). NPA is nothing but the set of bad loans and bad assets. As RBI reported that the total amount of these bad loans is around Rs. 7.34 lakh crore by the end of June 2017.
Finance ministry cited RBI that 77% of total gross NPAs are from domestic operations of banks. SBI has the highest NPAs, around ₹1.86 lakh crore and PNB has around ₹57,630 crore and so on.
Bad loans have been making news for months now. Jeweller Nirav Modi has left the country with a loan of ₹11,500 crore and denied to return it to the PNB. In 2016, the notorious liquor baron Vijay Mallya’s company defaulted loan of ₹9,000 crore, before he fled to the UK. However, if you will see the full list of defaulters’ then you will find that Nirav and Mallya are just small fish in a pond of bad loans.
In 2015, a Supreme Court ruling made it mandatory for all banks to disclose the names of the defaulters. But almost all banks have not shown the full list of actual defaulters so far.
According to the Credit Suisse report, we came to know about famous corporate defaulters in March 2016.
The Anil Ambani-led Reliance Group owes the banks, ₹1.25 lakh crore, the largest amount owed by any company, according to the report. The GVK group in a large Indian conglomerate founded by Gunupati Venkata Krishna Reddy and the total amount of money owed by the company is ₹34,000 crore. Similarly, Videocon group owes the banks about ₹45,405 crore. The Lanco group owes ₹47,102 crore to the banks and the GMR Group company owe ₹47,738 crore.
Sadly, this is not all. The Jaypee Group has cost the banks ₹75,163 crore. The Adani Group has defaulted on ₹96,031 crore of the banks’ money, the Essar Group’s balance sheet shows a debt worth ₹1.01 lakh crore and the Vedanta Group owes the banks nearly ₹1.03 lakh crore. The government is unable to make these corporate sector organisations return the money and moreover, thousands crore of loan has been waived in previous five years. However, the NPA is still increasing.
To overcome this problem, the government decided to help the recapitalisation of the PSBs by infusing ₹2.11 lakh crore worth of public money. This infusion of money will not help to overcome the banking sectors situation until the defaulter is not put behind the bars. I say this because, in my opinion, the government will again give them loans and again NPA problem will eventually reprise.
It is not surprising that agencies like FICCI have given suggestion to privatise these public sectors banks. In my opinion, this means that PSBs should be given in the hands of private firms who already have increased the NPA or has been declared as defaulters. Private banks are also facing the same problem of NPA even though the net value of these is less than the PSBs. If privatisation is good, then why are these private companies failing to pay back their banks loans? Most of the private sector firms of India are under debt, then how can we ensure that the private banking system works smoothly?
As we already know, in the European Union, banks were private, but even then, to strengthen those banks from banking crisis like NPAs and bad assets, the government had to recapitalise by infusing public money.
What does privatising the PSBs mean in simple words? It means that due to the fear of thieves, we should give them the keys of our house instead of putting them behind the bars. The Indian government should learn from China which has a much larger economy than India about how they have controlled NPAs. China has only a 1.75% NPA ratio in place, whereas, India stands at 9.85%.
According to latest reports, recently, the Chinese Supreme People’s Court has prepared a list of 67.3 lakh big defaulters. According to a Global Times report, the Chinese government has banned the air tickets of 61.5 lakh defaulters and train tickets of 22.2 lakh defaulters. These people also cannot stay in five-star hotels or send their children to expensive private schools.
So, instead of privatising public sector banks, the government should be stricter toward these defaulters and take action like China. Perhaps then, we can stop Nirav Modi and Vijay Mallya from flying away.