Ajay Shah: Worst-case scenario for the banking crisis

Ajay Shah: Worst-case scenario for the banking crisis: Our banking crisis is one of the biggest challenges faced by macro/finance policy in many decades. With banking crises, every day of 'extend and pretend' drives up the cost. How will the story unfold in the absence of a strategy for the short term...

Handle PSBs with care!

Ajay Shah’s piece “Worst-case scenario for the banking crisis” (Business Standard, Snakes & Ladders, July 11) is obviously an attempt to hasten the process of ‘privatisation’ of India’s banking system. The cat comes out when the writer draws a parallel to the doctored killing of a prestigious public sector mutual fund called UTI. Looks, there is some similarities in the way UTI was handled when private mutual funds found its presence uncomfortable and the present approach of analysts like Ajay Shah to the PSBs’ present predicament.

It is easy to get confused by comparisons and by drawing parallels from historic evidence elsewhere in totally different situations. Let us be clear that there is no ‘banking crisis’ in India as of now. This is not to deny the need to urgently tackle the problems faced by the banking sector due to policy lapses spreading over a decade or so.

Presently, as private sector banks have failed to grow and improve their share in India’s banking business to any respectable level despite under-performance by PSBs, the country is left with no option but to rejuvenate banks in the public sector. Viewed in this context, shift from the present palliative care approach to one for rejuvenation has to be fast. Anyway, transfer of inefficiency to private ownership is not an acceptable option.

With the exception of State Bank of India, Indian banking sector was under private ownership for decades after independence. The need to nationalise was felt in the context of the refusal of private sector to cater to the development needs of the country including taking banking service to semi-urban and rural areas and meeting the
credit needs of small borrowers. Such responsibilities are still met by PSBs is evident from the fact that post-nationalisation, the residual and new private sector banks together could, till date, manage a market share of less than 30 per cent in the country’s banking business. To infuse efficiency in the working of PSBs, GOI and RBI may commission an expert study of the working of the banking system for remedial measures with restoration of PSBs’ health in focus. Such a study should, inter alia look at:

i)          HR issues including recruitment, career progression and remuneration packages in PSBs vis a vis their successful counterparts.

ii)         Immediate need to ensure efficiency and autonomy in management at top level.

iii)            Possibility of lateral mobility of middle and top level executives across public sector and private sector banks and supervisory and regulatory bodies in the financial sector. Ideally, as early as possible, a Financial Sector Service comparable with other civil services should evolve.

iv)       Merger of loss-making or redundant bank branches with branches of other banks.

v)        Revisiting Lead Bank Scheme to ensure that social responsibilities are not neglected.

vi)             Enforcing discipline in lending to big borrowers.

vii)          Transfer of business to other PSBs or private sector banks in geographical areas where a particular bank is not successful.

M G Warrier, Mumbai