Collusion= bank swindles

PSBs Privatising = Predators

By Shivaji Sarkar

Is privatization of public sector banks (PSB) the panacea? A strong lobby seems to propagate it and it includes almost all major industry chambers and many others.
However, Finance Minister Jaitley paid put to this by attaching highest priority to the health of the public sector, asserting, India was not ready for PSB privatization and the present characteristics of PSU banks would continue. “I think India still realises that there has been a very important role that some of these banks have performed”.
Obversely, the private sector is projecting public sector banks per se as “inefficient” and pleading for their hand over to the private sector for “better management as also to check frauds”. A good argument!
But does the CRB that was liquidated about two decades bank in India qualify in that argument? It might be remembered a few months before it collapsed a leading news magazine had certified it as the best bank of the year. What about the Lehman Brothers and a series of other banks and financial institutions which led to the 2008 sub-prime crisis in the West? They were all private entities.
Moreover, who have been defrauding banks? They forget that India has some gems of the industries in the Navratna public sector undertaking (PSUs).
The 1930’s Great Depression which shook the world economy and led to World War II was the creation of the private bank-stock market-industry collusion. That was also the time when several Indian banks became fly-by-night operators. Whereby, many Indians lost millions and billions as bank collapses were part of folklore and fiction. Ditto the case in 1910 when private banks in India too failed.
The Reserve Bank of India (RBI) history notes that between 1935-47 about 900 banks failed and 665 banks failed between 1947-69 ie before nationalization.
Even in the 1960s some of the big banks were often media fodder for mismanagement by their private owners. Some were rumoured to be on the verge of closure a number of times. Other banks which included Punjab National Bank, saw depositors queuing up to withdraw money as the bank was supposed to be in crisis.
Notably, banks which survived on the common man’s deposits had earned the reputation of serving only the big ones.
Moreover, bank nationalization did not come as a sudden move or because of socialistic fervour. It was being demanded even in 1950s as loans were difficult to get by even depositors. Many industrial houses which had direct or indirect control over banks were accused of accessing funds without following any written procedure.
Shockingly, the nation came face to face with this modus operandi in the Harshad Mehta and Ketan Parekh scams during the 1990s.
In mid 1970s, the Bank of England bailed out around 30 smaller banks and intervened to assist 30 others even as lost about £ 100 million. This was in the wake of the 1973-74 UK stock market crash, which hit the country while it was already in the midst of a housing price crash. This later led to severe inflation in UK.
Undoubtedly, this is a phenomenon with many Indian banks having heavy exposures, post 2008 to real estate and infrastructure sectors are facing today. Succinctly, called non-performing assets (NPAs) crisis. As the Government continues to recapitalize, the nation sees inflation creeping in.
The private sector had swindled banks in many ways during the last 200 years. This has not stopped even now. The fraudsters have become sharper and mastered the art of depriving PSBs.
Interestingly, what Nirav Modi and Mehul Choksi did since 2006 onwards was to deprive Punjab National Bank of Rs 11,400 crores. This was similar to what a pearl merchant did to the Indian Specie Bank in 1913. The merchant took heavy loans from this bank and failed to repay, leading to the collapse of the Specie Bank.
Alas, fraudsters go on repeating history and bankers never learn from it.
The refrain all these centuries have been one: If banks had maintained transparency, accounts frauds could have been detected in advance. Sadly, this did not happen. Worse, sentiments about banking mismanagement have changed very little.
This is the crux. The private sector has been milching public money for its own good and driving the economy to peril. And the public sector has been finding it difficult to save people’s money entrusted to it. The problem as Jaitley says is not the PSBs, but how banks could save themselves from predatory practices and trust deficit of the private sector and which include large companies across the world.
Despite this, the Government is considering reducing its stakes in PSBs. As it needs funds and divestment is being resorted to raise funds to offset revenue shortfall. This requires a wider discussion as disinvestment means increased exposure to private players in the governance of banks.
Clearly, the checks and balances have to be reinforced. Till now the predators are working from the periphery. Such dilution may give them access to inner controls.
Arguably, would not full privatization be fine? Of course not. The nation has to realize that this is what many of the private players want. The ponzi operators during the last 20 years, including Sahara, have played havoc. Consequently, leaving finances to such players would be extremely risky.
Pertinently, PSBs are under social control and open to scrutiny while the private sector is not open and many cover ups even in tailoring balance sheets happen despite recent stringency in rules. The biggest example is of Satyam. Hence, handing over nationalized banks on a platter to the predators themselves would not be in the interest of anyone.
Frauds might multiply but a “clean operation” could be projected for a holier than thou approach. Finances have to be guarded. They have to be shared in widespread areas and awareness created for savings, deposits, lending and borrowing among all sections for overall growth and happiness. Confining it to a few hands through privatization has always been a problem.
Further, improved regulation is possible in the public arena. The private sector knows how to dodge it. Yes, the PSBs need autonomy, insulation from interference, though often it is difficult but can be ensured with a real transparent operation and allowing employees to blow the whistle without fear of reprisal.
In sum, India has to protect the PSBs and must not privatise them to save the wealth and savings and ensure continuous growth of the nation. —- INFA