Vol. XLI No. 17 April 23, 2017

Privatisation of Public Sector Banks With Manufactured Consent

C P Krishnan

THE government of India through its communication dated March 16, has instructed the public sector banks to arrive at a tripartite memorandum of understanding among the government of India, bank managements and the unions of employees & officers which according to it will help to turn around these banks.

The government is hell bent to privatise the PSBs and is now contemplating, through this move, to transfer the burden of loss on the shoulders of the workforce who render yeoman service.  It is the grand design of the government of India, RBI and the managements of the banks to make the employees and junior officers a scapegoat for all the ills of the banking industry.


A preliminary memorandum of understanding has been arrived at with 11 banks namely Andhra Bank, Allahabad Bank, Bank of India, Bank of Maharashtra, Central Bank of India, Dena Bank, IDBI, Indian Overseas Bank, UCO Bank, United Bank of India and Union Bank of India. Almost all the unions have subscribed to that.

The area of understanding includes

     1.   Asset quality including recovery, NPA reduction etc.

     2.   Optimum utilisation of capital, sale of non-core assets, broad basing investor base etc. 

     3.   Improvement in productivity/efficiency including branch rationalisation

     4.   Improvement in business process

     5.   HR policies and practice

In this MOU, there is a commitment by the management and unions that they take responsibility of finalising the turnaround plan by  April 30 in consultation with the advisor (SBICAPS) and government of India. 

In this MoU itself there are enough indications that the government of India is planning for further disinvestment in the name of “broad basing investor base”, closure of branches in the name of “branch rationalisation”, adding workload on the staff in the name of “improvement in productivity/ efficiency” and curtailment of the existing privileges of the employees and officers in the name of “HR policies and practice”.  But there is no commitment on the part of the government and the bank managements to recover NPAs from the big defaulters through enactment of more stringent laws and their strict implementation. Further in this MoU it has been abundantly made clear by the bank managements that the final MOU will not be limited to the areas mentioned in the preliminary MOU. 

There is a threat in the preliminary MOU that in case the turnaround plan is not successfully implemented, “the government would be free to take appropriate action as it may deem fit in the facts and circumstances of the matter”.

In the preamble of the preliminary MOU, it is mentioned that the concerned banks do not have adequate capital to meet the required capital to risk weighted asset ratio (CRAR) as stipulated by the Reserve Bank of India and they sought recapitalisation assistance from the government of India. Primarily this is the reason attributed by the government of India for the need to sign such a MOU.

What makes the government take such a stand? Is there any logic in that?  Whether the government and the bank managements have done their part for the improvement of public sector banks (PSBs)? Is the government serious to protect the PSBs which play a vital role in the improvement of the standard of living of the crores of the poor and the marginalised? These are some of the questions that arise genuinely in the minds of the common bank employees and the general public. 

The capital requirement of the PSBs put together is estimated to be around Rs 1,80,000 crores by March 2019 according to Indradhanush, a plan for revamping of public sector banks released by ministry of finance on August 14, 2015. This assessment is based on Basel III norms.   

A question here arises whether at all, India should adopt Basel norms which are basically voluntary and when the Indian government is not directly a party to that.  When these norms are broadly meant for private banks which are vulnerable to market risks and whimsical manoeuvrings from the top, should Indian government and Reserve Bank apply the same yardstick for public sector banks also? The Indian public sector banks enjoy support of and back up by a sovereign government and hence they cannot be equated with the private banks.  Therefore the Indian government should resist the pressure of the international finance capital to thrust Basel norms for the public sector banks of our country.

There is a typical example that the successive governments at the centre withstood the pressure from the international community and still not subscribed to Non-proliferation Treaty with regard to nuclear weapons as the treaty is one sided and does not ensure level playing field.  Why doesn’t government of India take a similar stand with regard to Basel norms also?

Renowned economist, CP Chandrasekar has raised a pertinent question: “Why are the government and Reserve Bank in a hurry to adopt Basel III norms when at present countries like USA which are direct party to the creation of Basel norms are only in the process of adopting Basel II norms?”

Another reputed economist Prabhat Patnaik in his write up makes the following observation: “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)

Further Prabhat Patnaik says in his another write up “Suppose, for instance, that the government simply borrows funds from the RBI to increase the nationalised banks’ capital base.  No matter where this capital is held, whether with the RBI or in the vaults of the banks themselves, the entire operation would simply amount to a book transaction: the RBI would hold some IOUs of the government on its asset side and its own IOUs of an equal amount, constituting the enhanced capital base of the banks, would appear on its liability side”

Why are the government of India and RBI not ready to resolve the capital issue in the way suggested by Prabhat Patnaik, in case they feel that resistance to adoption of Basel III norms would not be feasible?

Hence it is crystal clear that the very fundamental argument of the government of India to go for this MoU with the unions and associations is weak and unacceptable to the workforce.