January 25, 2015

Gyan Sangam - A Road Map to Privatisation of Public Sector Banks

C P Krishnan

IT is very much shocking that the meeting of chiefs of the public sector banks named as Gyan Sangam held on January 2-3, 2015 at Pune laid a road map for privatisation of public sector banks. The BJP led government at the centre took the lead for this summit. All the presentation papers were readied by the ministry of finance with McKinsey, a multi-national company (MNC) as knowledge partner.  This was very much visible from the power point presentation made in that meeting.

The participants were divided into six panels headed by chairmen of Allahabad Bank, NABARD, Indian Bank, Andhra Bank, State Bank of India and Bank of India. The quintessence of this presentation is to privatise public sector banks (PSBs).  It is a matter of shame that being heads of the PSBs, they have been party to the presentation of papers which essentially is a drive towards privatisation of PSBs.  It is strange that former chairman of Axis Bank P J Nayak who headed a panel advocating privatisation of PSBs was also invited to the summit.




The suggestion of one of the panels is to establish Bank Board Bureau (BBB) as a first step; then this BBB will evolve into the Bank Investment Company (BIC) through appropriate legislation; then government share-holding has to be transferred to BIC; then the proposed BIC’s investment in a bank to less than 50 per cent to be reduced over the long term (within two years).  Finally all ownership functions will be transferred from BIC to Bank Boards; Bank Boards will become ‘truly empowered’ and BIC will remain an investment company.

The whole idea in this circuitous process is to hand over the PSBs to the private corporates.  With the cap of individual voting rights in nationalised banks enhanced to 10 per cent from 1 per cent in the year 2012 and with the FDI cap fixed at 74 per cent, the risk of ownership of PSBs going into the hands of foreign based MNCs is very high.

The BJP has been ideologically opposed to public sector and in support of private sector.  BJP’s earlier incarnation Jan Sangh opposed nationalisation of banks in 1969 when the then Congress government brought a legislation in the parliament.  The earlier NDA government headed by Vajpayee introduced a bill in the Lok Sabha in December 2000 to reduce the government shareholding to 33 per cent thus paving way for privatisation of PSBs.  The united determined struggle of the bank employees including through observance of several days’ strike to oppose privatisation attempt and the solidarity support to the movement extended by Left and democratic parties only prevented such a catastrophe. Again the present BJP government is promoting the idea of privatisation of PSBs.




·                     When agriculture contributed nearly 44 per cent to the GDP of the nation in the middle of 1960s, the credit to agriculture from the private sector banks was a negligible 0.2 per cent.

·                     After nationalisation only, the priority sector lending of 40 per cent to the small and marginal borrowers and within this compulsory 18 per cent credit to the agriculture was ensured.

·                     One can safely say that the contribution of credit from PSBs was one of the prime reasons for achieving self-sufficiency in food grain production in our country.

·                     The performance of the private sector banks was dismally poor.  More than 550 banks became bankrupt between 1947, the year of Independence and 1969, the year when 14 major private banks were nationalised. 

·                     Even after nationalisation, more than 25 private banks became bankrupt and merged with the PSBs.

·                     The new generation private bank namely Global Trust Bank (GTB) that came into existence as a result of the RBI policy of 1993 incurred a huge loss amounting to more than Rs 1000 crores. This loss was borne by Oriental Bank of Commerce (OBC), a public sector bank since GTB was forcibly merged with OBC. Nobody from the GTB was held accountable for this.

·                     Five banks out of ten new generation banks floated in 1993 failed and thus they were merged with other banks.

·                     The discussion paper of RBI released on August 11, 2010 quotes as under:

“The experience of the Reserve Bank over these 17 years has been that banks promoted by individuals, though banking professionals, either failed or merged with other banks or had muted growth”

·                     The RBI discussion paper dated August 27, 2013 reads as under:

“The predominance of government owned banks in India has contributed to financial stability in the country. Experience has shown that even deterioration in bank financials does not lead to erosion of consumer confidence in such banks.  This kind of consumer confidence does not extend to private sector banks.”

·                     “Further, as demonstrated in the recent global financial crisis, public-ownership has positive implications for financial stability as deposits migrated from the private sector banks to public sector banks.  Thus, even at the height of the recent global financial crisis, retails deposits in India did not desert banks.  This was in contrast to the banks in advanced economies where there was a liquidity crisis due to deposit run, as a result of which there was a need for blanket extension of deposit insurance across Europe……..”

When it is clear from the above that only nationalised banks can serve the interest of the nation building and cater to the needs of the ordinary masses and when private banks have looted and plundered the money of the depositors without any obligation to the vast majority of the population, still the Gyan Sangam proposes privatisation of PSBs.  Then logically a question arises in the minds of democratic minded persons as to whose interest the government at the centre and top echelons of the PSBs serve?

The central government and the chiefs of PSBs advance several arguments for privatisation.  Some of the vital ones can be analysed.

·                     The stressed assets and non performing assets (NPAs) are more in PSBs than in private sector banks – is one such argument.  At the outset the veracity of this statement is under question.  Secondly, the reason for accumulation of NPAs  in the PSBs is flawed recovery mechanism. The statement of the former finance minister P Chidambaram reveals that 30 top defaulters in a bank contribute more than 50 per cent of NPAs. Why laws of recovery are not made stringent to enable PSBs to recover bad loans from the big defaulters? Whom are they facilitating by keeping teethless laws in the statute book?




Another argument advanced by them in the Gyan Sangam is that level-playing field is not there between private sector banks and PSBs. Some of the fields suggested by them are:

1. PSBs have to fulfil priority sector lending (PSL) obligations while private sector peers are allowed to purchase PSL securities from NBFCs

2. PSBs have spent the last three months focusing on the PMJDY and opened 10 Cr accounts while private sector peers have opened only 30 lakh accounts


3. PSBs have 33 per cent of rural branches while private sector banks have only 15 per cent rural branches


4. PSBs invested heavily in infrastructure financing and four other sectors keeping nation building interests in mind whereas private sector has not made any such investment


These are really genuine concerns.  Instead of advancing an argument that private sector banks should be compelled to fulfil RBI directives strictly or private sector banks should be nationalised, the argument to privatise PSBs, though appears to be innocuous, is highly dangerous and harmful to the interests of the people of this country.





The repeated argument put forth by the successive governments of UPA and NDA at the centre, RBI, P J Nayak committee and Gyan Sangamis that “there is requirement of capital of nearly Rs 2,40,000 crores by 2018 in terms of Basel III norms which cannot be provided by the government.  Therefore PSBs have to be privatised and allowed to raise capital from the market”.


When the Basel norms are basically meant for private banks and voluntary and when India is not a direct party to those norms and when confidence of the common man in the PSBs is abundant irrespective of the Capital, why did our country choose to adopt the same? When some of the advanced countries are still in the process of adoption of Basel II norms, why should India be in a hurry to go for Basel III norms?

The total revenue foregone under the heads of corporate income tax, customs duty and excise duty in the successive budgets of the central government from the year 2004-05 to 2013-14 work out to more than Rs 36.5 lakh crores.  Assuming that Basel III norms are to be adopted, can equity capital to PSBs not be provided if this kind of drainage of income to the government exchequer is stopped?

According to the renowned economist Prabhat Patnaik, “the provision of additional equity for nationalised banks is a complete non-issue. And the reason for its being a non-issue is simply that with nationalised banks, the government is committed to protecting them anyway, precisely by virtue of being their owner. No Basel III "norm" in terms of equity base is actually necessary for them, for they already enjoy the protection of the sovereign government that owns them. Fulfilling this equity "norm" which is unnecessary can therefore take the form of a mere book transaction, which is no more than just a ritual”. (Telegraph, December 18, 2014)

Hence these arguments to privatise PSBs do not hold water.

In the same fashion, the chiefs of PSBs want ‘freedom’ from CVC, CAG and RTI to enable them to take ‘bold’ decisions at par with private banks. Can they list the names executives of PSBs who have been hounded for taking right decisions? When they demand removal of oversights like CVC, CBI etc., will they remove the chapter of disciplinary action from the service conditions of the officers and workmen? This argument of ‘freedom’ form CVC, CBI etc., is also highly perilous as conceding this will lead to large scale scams. One fails to understand the logic behind the suggestion of ‘freedom’ from these institutions and Act.  If they want to establish level playing field their demand should be to bring private banks under the ambit of these.





During the interim period before privatisation, the Gyan Sangam suggests consolidation of PSBs.  In their view only five PSBs have the acquisition capability and the rest are to be targets.


The RBI report dated August 27, 2013 itself admits that consolidation will result in rationalisation of branch network which may lead to closure of branches and redeployment of staff and consolidated banks may rather cater to big ticket business, in the process adversely affecting financial inclusion.

The same report says, “There is empirical evidence (Dymski-1999) that one consequence of the merger wave in US banking in 1990s has been that loan approvals for racial minorities and low income applicants have fallen and the extent of this decline was more severe for large banks

The report further saysConsolidation could also result in less competition…. and arbitrary pricing of products”

Further hardly 5 per cent of the 6,32,000 villages have a bank branch of PSBs.  The number of rural branches has been reduced from 54 per cent in 1994 to 33 per cent in 2014.  Nearly 43 per cent of the rural credit is financed by money lenders, landlords etc.  The number of suicides of farmers for want of institutional credit at low interest with long repayment period is on the increase.  Hence merger and consolidation of PSBs are sure to be detrimental to the interests of the rural poor particularly farmers who are the backbone of our Nation.





Another dangerous move of the Gyan Sangam is to fix interest rate of the credit according to the risk involved.  There is an open call to remove the cap of the interest of the agriculture credit for small and marginal farmers.  This is done with a view to fixing the interest rate of unsecured loan like education loan and agriculture loan at higher per cent and that of corporate loan at lower per cent.  The idea is to discontinue the priority sector lending which will ultimately widen the gap between the wealthy and poor astronomically.


Gyan Sangam also suggests the need to shift from industry level agreements with unions on wage and recruitment to bank specific arrangements with emphasis on management agenda. If wages and service conditions differ from bank to bank with thrust of management issues, the overall unity of 10 lakh bank employees and officers working in PSBs and private sector banks is likely to be weakened.  That is the aim of this move, as the powerful enlightened trade union movement in the banking industry with a commitment to protect the people-oriented industry, has been the stumbling block for the people at the helm of the affairs to implement their dream of privatising PSBs. Further one is dismayed to note that RBI governor Raghuram Rajan wants the government to re-look campus recruitment, currently banned because of a Supreme Court ruling. They also want hire and fire policy to be introduced in PSBs.


It is reported in the media that Hasmukh Adhia, secretary, department of financial services, said, "The prime minister has assured bankers there will be no interference from the government in the internal workings of any bank. He said 'you will never get a phone call from even the PMO, let alone anyone else'."


Very recently Adani Enterprises has been in principle sanctioned a billion dollar loan by State Bank of India for an investment in Australia during the visit of prime minister Narendra Modi to that country along with Goutham Adani, head of Adani Enterprises.  Then, one can conclude as to what will be the value of statement of the secretary of department of financial services.


Already the bill to privatise regional rural banks has been passed in the Lok Sabha in December 2014.  Serious attempts have been made by the central government to cripple 93,000 primary agriculture societies which have been extending rural credit and are directed to perform as business correspondents of central co-operative banks. It is vividly clear that if the over-all idea of Gyan Sangam is allowed to be implemented without any check, it will be disastrous to the interests of the people of India.  The need of the hour is to halt the move of the government of India and the chiefs of PSBs from proceeding in the direction inimical to the interests of the common man.