Can the ‘Gem of a scam” become “Gem of an opportunity’??

The debate on privatisation of Public Sector Undertaking (PSU) banks has a habit of rearing its head in public discourse in India with regular frequency. Not so long ago, it was when the PSU banks were hit by the NPA (Non-Performing Assets) crisis embodied by the likes of a fleeing Vijay Mallya. Later, it was when the Government finally took a call on recapitalisation of the PSU banks last year. And now, it is when the Nirav Modi – PNB scam, the latest to hit the Indian shores (and shares) surfaced. Yesterday even Arvind Subramanian, the usually reticent Chief Economic Advisor has joined the debate!

Reformists are of the view that the Government is betraying Winston Churchill again and again who famously said that “Never let a good crisis go waste” in the context of biting the PSU bank bullet. They are of the view that the repeated crises which hit the PSU banks provided a plausible excuse and “Gem of an opportunity” (pun entirely intended) for the Government of the day to privatize PSU Banks and thereby get out of the rigmarole of using tax payer’s money to keep bailing them out. The underlying assumptions being that the PSU Banks are run usually inefficiently and being under sarkaari control are subject to pulls and pressures.  While this is true for almost all PSUs in general, money being closer to the pocket and heart of the public, privatisation topic haunts the banks more. One cannot dismiss the very popular data point thrown in the above argument’s favour which is that the market cap of a relatively younger HDFC Bank which is privately held is higher than all PSU banks put together!

At the core of the argument against privatisation is of course the security it provides to the Aam Admi. Irrespective of what happens around the balance sheets of these PSU banks. The general public does believe that the Government will not let their savings go down the drain come what may. One remembers the furore and angst in WhatsApp groups recently when we were all told that our deposits above 1 lac are not safe if the banks go belly up. So, for any Government of the day, it is a minefield of a quandary to attempt privatisation of PSU banks unless it is completely politically immune to a public outrage and the after effects thereafter!

Be that as it may – the Government’s quandary I mean, the larger issue is the conflict bordering on hypocrisy in the minds of people like us which is – my direct stake in the bank by way of savings/deposits Vs my indirect stake in PSU banks by way of government’s stake which is in effect all our tax payer’s money. In short “My money” Vs “Our Money”! Nirav Modi has just swindled a government bank of few 1000 crores but that still is not “My money” though it is “Our Money!  And largely our outrage has stopped with laughing out loud (or is it laughing like Renuka these days?) looking at jokes, memes and sarcastic jibes on the Government while a smart cookie has “been crying all his way to the bank”! I think as individuals we are more concerned about the safety and security of our savings which we feel is protected if PSU banks remain as is – Government owned.  Even if that means

  • The Government of the day interfering in the day-to-day functioning
  • The Government mandating the banks to carry out populist programmes which may not make commercial sense but may make immense political sense to them
  • Mounting NPA’s due to favouring cronies of the likes of Vijay Mallya
  • The Nirav Modi kind of frauds due to conniving staff
  • Less accountability in the system.

At the end of the day, as along as the banks are Government owned, the only fix for all the above ailments is injecting more capital which is by tapping into tax payer’s money. It’s obvious that the same money if not used for bailing out banks could be put to use for better roads, power, water, electricity or even for that matter the proposed grandiose Health Insurance programme – stuff our country has been deprived of in the last 70 years since Independence.

The 1.6 billion dollar question is whether as tax payers and citizens we are okay and ready to let the government seize the opportunity and privatise the PSU banks? My guess is maybe we are not. And this stems from our socialistic belief that next to God, the Government is the savior and hence must protect us. And the constant fear associated with losing our money if not protected by the government.

In a country like ours which is evolving and is still a work in progress on many fronts like urbanization, education, social mobility,..,… the fear is mostly legitimate. Coupled with the fact that the private sector has not fully covered itself with glory. But the performance of the new private banks set up since the opening up of the economy in 1993, provide quite a lot of hope. For example, as far as we know, the new private banks are not part of the NPA problem.  Even during the 2008 Lehman shock, when all over the world financial institutions were rocked and many went belly up, in India none of the banks including the private ones were affected so much (though banks like ICICI had exposures to the subprime crisis) due to very strong regulations in India.  So, so far we could bank on these banks!

In summary, my point is may be if not all in one go, the Government could contemplate privatising PSU banks in batches of say 2 starting with the smaller ones. This will give adequate space to watch out for any pitfalls in the process and fine tune the same. This of course with the continued strong regulatory frame work in place.  The smooth completion of the ongoing privatisation of Air India may give the much needed heft to the Government.

With may be all banks out of governmental control in the next 10 years, the frequent exercise of tapping into “Our Money” to protect “My money” may be a conundrum of the past. The moot question remains if this current “Gem of a scam” will be turned into a “Gem of an opportunity” by the Government and that we as public will let that pass!

Postscript: Overheard in a lift: “These jewelers kept telling us that Diamonds are forever. But, they never told us that loans are also forever! Saala vaapas hi nahi kiya!!!

Toon courtesy: Satish Acharya

0 thoughts on “Can the ‘Gem of a scam” become “Gem of an opportunity’??”

  1. Anand – Well written. Threadbare analysis 👏👏
    As you rightly said, just getting out of PSU banks is not something that’s practically possible in the near future for the govt.
    So it is better to try n improve the controls in the bank. In PNB case also, it might turn that some basic checkpoints were missed or bypassed. Atleast in the current scenario it won’t be objected by all stakeholders

    1. Thanks MS. I agree that it’s politically a landmine that too at the fag end of the term for this Govt. But I think they should do the ground work internally and get going in 2019 after they return.

  2. When will we learn our lessons?

    It was the private banks, FIs, credit rating agencies, insurance and derivatives dealealers which caused the sub prime crisis that affected the whole world! And again public money was used to bail them out then too! And we are to believe the poppy cock that privatisation i.e., giving public property / assets to politicians and crony capitalists is a solution … and being forever ransom to them is desirable?

    The solution is not privatising that is such a simplistic suggestion.

    The solution is a set of actions – removing political control over day to day PSU ops along with systemic controls to prevent malfeasance; a strong independent CBI & ED for effective prosecution; an independent yet accountable judiciary to prevent vested interests from influencing prosecutions; and finally the elephant in the room no one talks about – A strong Lokpal to hold the politicians accountable!!

    It is not at all simple but simplistic knee jerk suggestions like privatisation will land us in worse situations than we are currently in!

    1. Thanks Vaitheeswaran for the feedback! Its not knee jerk! As long as the ownership is of the Govt. many points you’ve mentioned remain on paper. In India as we have seen in the past any forward looking reform is always looked at with scepticism, suspicion,.. but as we have seen they all have finally only benefited the public, the Industry,..
      I have mentioned that a strong and effective regulator while govt giving up ownership which you probably missed.

      1. Thanks for the reply Anand.

        Would be nice if you can share specific examples on how the public has benefited from privatisation. Maybe we can discuss that.

        On my part, I’ll give you specific examples to support my thesis that privatisation esp in areas of mass public + social interest is unwarranted and against the interest of the country and public.

        Let’s take the privatisation of electricity distribution services by Sheila Dixit in Delhi. It was supposed to have brought higher efficiencies, lesser outages and better services to the citizens apart from competitive rates.

        What actually happened? After privatisation and handover of electricity utilities to Reliance and Tata, the costs shot through the roof. The costs to consumers was amongst the highest in the country. There was mass overbilling, huge shortages and the private operators coming back to the government time and again for more hikes/ investment/ sops.

        Long story short – AAP/ Kejriwal promised to reduce costs to consumers, give free water etc and yet provide better service and lesser outages. Naturally the private operators and their political masters opposed and called it populism/ naivete etc.

        The Delhi government managed despite legal challenges were able to institute a CAG audit resulting in exposure of the inflating of costs and other fraudulent activities.

        Today thanks to the political will, cost of electricity in Delhi is one of the lowest in the country and (yesterday’s news) Delhi witnessed lowest ever power cuts this fiscal.

        The same drama was played out in the KG basin (Reliance), Adani power forays in Maharashtra, Rajasthan etc. In all these cases the matters are being hushed up. (Here the point is that the political will being lacking, and there being no transparency it bring with the private sector, the country is loosing out.)

        Again, repeating, if you see, the problem is not ownership of the companies by public. When it is owned by public then at least you can have audits (like the CAG) done and get the real picture. When it is in private hands, for the most part it is behind the corporate veil.

        The big problem is political corruption/ interference for personal gains. They love the idea of moving assets from public to private because then they become proxy owners and are away from public scrutiny.

        What really does the public gain?

        So if it is privatisation of things like soap manufacture/ FMCGs etc, I am with you.

        But to privatise public assets in banking, public utilities, matters of national security and interest would be courting trouble.

        2) There can be no effective regulator without effective prosecution, judiciary and a tight leash on political interests to prevent them from influencing the regulator (remember net neutrality?) That is in a sense what I was saying.


  3. Good one RSA…The way you capture the current affairs in your weekly blogs is admirable and it makes more interesting… The way things are happening (diversified too from Padmavathi to PNB) in our country, u will continue to have meat for every week for your blog… Keep writing Mate..

  4. Good one Anand….

    There will be 2 hurdles….
    1. It requires passing of legislation in LS/RS and it is not going to happen atleast in the next 5-10 years….

    Also both BJP and Congress is not going to come out of supporting cronies who are going to provide them money for election. They need PSBs to meet this need. Modi gave some hope initially. But it does not appear to be so now. It requires lot of political will, majority in LS/RS and revamp of political system in this country.

  5. Very well written.But what of RBI?Should it not be called to explain?
    And if we cannot trust the govt how can we trust private individuals.

    What we sorely miss on is-ethics and morality.

  6. Well written post…..i also believe that after this incident. …the call for privatisation is getting stronger….how ever we shouldn’t forget the crisis created by pvt sector banks in Western economies.

  7. I know this if off topic but I’m looking into starting my own blog and was wondering what all is required to get set up? I’m assuming having a blog like yours would cost a pretty penny? I’m not very web smart so I’m not 100 sure. Any recommendations or advice would be greatly appreciated. Appreciate it

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