At the heart of banking woes are structural problems and ideological cobwebs.
Einstein is said to have described absence of sanity as doing the same thing over and over again, and expecting different results. On this parameter, much of India’s economic policy qualifies, the persistence with public sector banking being the crowning folly of our political masters. They do everything to revive banking except go for the real solution: denationalisation or privatisation. The proposed merger of Bank of Baroda (BoB), Dena Bank, and Vijaya Bank—touted as a reform—is a testimony of that persistence.
The government cleared the amalgamation at a meeting of a ministerial panel called Alternative Mechanism (that is how the Narendra Modi government has rechristened the Group of Ministers or GoM). The panel, headed by Finance Minister Arun Jaitley, also comprised Railways Minister Piyush Goyal and Defence Minister Nirmala Sitharaman. “While making this suggestion, we have borne in mind that we don’t want a merger of what are relatively weak banks,” Jaitley said. “You can have two well-performing banks absorbing a weak one in the amalgamation process and hopefully, creating a mega bank which will be sustainable, whose lending ability will be far higher.”
The government may like to live in its own fantasyland, but the market exists in the real world. Investors don’t seem excited about the merger. On Tuesday, for instance, the shares of most public sector banks (PSBs) fell, with the 22 state-run lenders losing over Rs 20,000 crore on bourses. While Dena Bank, the weakest of them, soared 20%, the highest in over a decade, Bank of Baroda dropped 16% and Vijaya Bank 5.8%. “The issue is: it will be a long, long time before anything happens, and a long path to work out the bad-loans issue,” David Smith, chief investment officer at Smith Tan Asset Management Pte, told Bloomberg. “The price response shows it’s a boon for the weak and a new headache for those getting better.”
The government may manage to shore up PSB stocks on exchanges—there is LIC—but this won’t make things better. In fact, Smith seems to be bullish about recovery, for he suggests that after a long, long time and along a long path, there could be revival in banking. He, like the government, is wrong: cure is possible if the medicine is right. The cure is privatisation; the longer we avoid that, the longer we prolong our misery (see Privatisation only solution to improve public banks, 25 February 2018).
At the heart of banking woes—indeed that of the entire economy—are structural problems and ideological cobwebs. Romance is that the nation and society own PSBs; the truth is that politicians and bureaucrats run them. Now, theoretically, it may be possible to have honest and competent politicians and bureaucrats; experience, however, shows otherwise. Almost half a century of government control over banks, with governments ranging from the Left-leaning ones to the Rightist, has shown that things have just gone from bad to worse.
If the political class is unwilling to learn from experience, and wants to persist with socialist dogma, there can be no redemption for the banking sector.
The structural issues are not just confined to the ownership of PSBs but also another ideological matter: freebies as an entitlement. The power sector accounts for a substantial chunk, about 20%, of the total non-performing assets (NPAs) which are in the region of Rs 10.3 crore. Quite apart from incompetence at various levels, there is the problem of non-payment and part-payment of tariffs by consumers. Certain sections like farmers are partly or fully exempted from paying their dues.
Why on earth one shouldn’t pay for using power? Well, only a JNU jerk can justify electricity as a free entitlement; but, unfortunately, governments of all persuasions accept and act upon such justifications. Including the Modi government, which is otherwise so anti-JNU.
The fact, however, is that there is no such thing as subsidy. If people don’t pay for a certain good or service, somebody else pays; in the case of electricity, that somebody else is government; and government pays only from the money it collects from taxes. So, it is the people who end up paying—as taxpayers, if not as consumers.
In the ultimate analysis, socialism is playing havoc with not just the banking and power sectors but also the entire economy. It is also boosting moral hazard—that is, people taking decisions and using resources which they would never be held accountable for. No harm has come, or is likely to come, to the politicians and bureaucrats whose decisions have ruined banking. Similarly, somebody else pays for the folks who misuse and waste free or cheap electricity.
PSBs generate moral hazard, immorality, corruption, and inefficiencies; worse, since banking is the blood of the body-economic, unhealthy banks slow down growth and check employment generation. Unfortunately, governments don’t see the evil of public sector banking and want to perpetuate it by introducing fancy schemes. Merger is among them.