50 Years Of Bank Nationalisation: Can India Follow Singapore’s Example In PSU Bank Reform?
She ran India’s largest lender. Managed a loan book which is now close to Rs 20 lakh crore. Executed a first-of-its-kind merger with five associate banks. Dealt with demonetisation and a bad loan crisis.
But ask Arundhati Bhattacharya, former chairman of State Bank of India, about what banking looked like in the years after 14 banks were nationalised in July 1969, and the memories come tumbling out.
Rural service was mandatory. Come rain or shine. To make the office more comfortable, we used ‘khas khas’ drapes in the offices. But they only made it more muggy! Loan ledgers were manual, thick and unwieldy. They even broke my bangles soon after marriage! Loan melas were infamous in those days, while commodity companies were the biggest borrowers. When computerisation happened, we all rushed to learn how to operate the computers. But partly so we could sit in the air conditioned room!
Bhattacharya, now retired, joined State Bank of India in 1997. SBI had been nationalised in 1955 and in 1969 another 14 banks were added to the pool of government-owned banks. One of the objective, as DN Ghosh, one of the architects of nationalisation program wrote, was to provide banking services to wider set of people.
Fifty years later, government-owned banks are still instrumental in providing access to banking services. They account for 66 percent of outstanding credit and 65.7 percent of deposits. Their network continues to be used to push government schemes, which comes with its costs. Yet, their performance continues to be compared with private peers who function purely on commercial terms, says Bhattacharya.
If you look at the state of financial inclusion, PSB’s do play a very important part in opening up that market. As the market matures and becomes more commercially viable, the private sector will just come in. At the end of the day the private sector will do whatever their commercial model tells them is profitable. The PSB’s do not have that particular aim alone. That’s not their only goal... but you get compared on the same platform. And that I think is unfortunate because it really and truly demotivates the PSB staff.Arundhati Bhattacharya, Former Chairman, State Bank of India
A Change In Model
The angst against the performance of government-owned banks has been at a peak over the last few years.
These lenders saw their gross non-performing assets rise to over 15 percent as of March 2018. Even now, gross NPAs are at over 12 percent. Half a dozen of these banks were put under the Reserve Bank of India’s prompt corrective action programme and forced to restrict lending. Eventually, the government as the owner of these banks, had little choice but to infuse capital.
Between FY11 and FY19, Rs 3.3 lakh crore in recapitalisation funds has been provided to PSU banks, Kotak Institutional Equities said in a report dated July 14. There has been little to show in terms of performance in return for this capital, though. The return on assets for most of these lenders has remained negative for four consecutive years, the report said.
Bhattacharya agrees that taxpayers, who eventually fund bank recapitalisation, must get more value in return. For that, the need for a change in the PSU bank model has now become apparent.
The PSU model has worked over a period of time but now you want these PSB’s to create value for the taxpayers who have invested in them through the government capitalisation....After all it is our money, taxpayer’s money and they should be getting better value. Why should the value be decreasing instead of increasing? If that means a model change then we need to consider a model change.Arundhati Bhattacharya, Former Chairman, State Bank of India
Bhattacharya suggests the government look at the manner in which Singapore’s DBS Bank is run.
DBS was established in 1968 by the Government of Singapore to help finance the country’s development. The Singapore government controls DBS through Temasek but the board and management of the lender is fully empowered. The model was cited by the PJ Nayak-led committee of 2014, which had suggested that a ‘Bank Investment Company’ be set up and the government transfer its ownership in public sector banks to this vehicle. By doing so, the committee, hoped that the government would distance itself from the functioning of India’s public sector lenders.
Bhattacharya believes that model is worth considering. “We should take those examples and build on them. There is no need to reinvent wheels, wheels are invented.”
While dramatic change may be difficult to implement at one shot, Bhattacharya recommends that the government continue to experiment with smaller but significant steps.
During her tenure, the government decided to merge SBI with its five associate banks. When the merger went through without much disruption, the government decided to announce another three-way merger between Bank of Baroda, Dena Bank and Vijaya Bank. That merger has been completed, at least on paper.
Suggestions have been made for more such mergers along with privatisation of some smaller PSU banks. Bhattacharya sees no harm in testing the waters for such ideas.
In respect of the other things that are on table, they should try out a pilot or two. There is no harm in trying out to see how it is going.... At the end of the day, what do we want? We want a vibrant banking sector and like anything else, anything that is growing old, if you want to energize it you have to bring in new ideas, fresh ones.Arundhati Bhattacharya, Former Chairman, State Bank of India
Bhattacharya also continues to bat for human resource reforms across PSU banks, a cause she pushed during her tenure as chairman.
She believes that more stability of tenures, ability to hire from campuses, and flexibility in remuneration is critical to ensuring that PSU banks have the talent that can compete with private peers. Some of these reforms have been under discussion for years. Slowly, banks have moved towards incentives through stock options, a proposal for greater flexibility in salary structures is being discussed by the Indian Banks Association. The government is also considering tapping private sector talent for executive director posts, Business Standard reported this week.
Such changes are essential, says Bhattacharya.
“A service industry rises and falls on talent available to it. We have to ensure that the talent we are getting right from the beginning is of the right sort.”