Five Ways Government Ownership of Banks is Harmful to All of Us

The government owns close to 70 percent of Indian banking business. But almost ₹ 2 lakh 27 thousand crore have been lost in past 5 years in banking frauds!

In a nostalgic reminder of our past, yet again a businessman ran away with taxpayers’ money. In the name of protecting the money of the citizens from the rich and greedy bankers, the government commenced bank nationalisation in 1969. Today, the government owns close to 70 percent of Indian banking business. But the situation is far from good. Almost ₹ 22,743 crore was lost in past 5 years in banking frauds.

We list down five reasons due to which government ownership of banks is harmful to you, me and the economy.

Moral hazard

Public-sector banks (PSBs) are aware of the cushion of implicit government guarantee they have in case of a loss or bankruptcy. This makes them lenient while providing loans which leads to bad financial outcomes for the bank and ultimately for the economy. Whereas a private bank scrutinizes each application carefully because failing to do so will have consequences for the employee and the bank.

There has been a steep rise in the gross NPAs or bad loans by PSBs, particularly from corporate lending. But since any loss occurred to a PSB will be retrieved from the taxpayer’s money, they continue to lend without worrying much about repayment of loans. In fact, in October 2017, the government announced a ₹ 2.11 lakh crore recapitalisation plan to put them back on their feet.

Burden on taxpayers

Today, 21 PSBs are financially dependent on the government for recapitalisation and bail-outs from time to time. And since the government itself depends on the taxpayers’ money for the same, it means taxpayers pay for all the bad decisions, losses and frauds that take place at PSBs.
The government has pumped over ₹ 2.6 lakh crore into PSBs in the past 11 years.

Destroys a level playing field

Private banks have to be efficient in running their business and also careful when giving out loans, as any mistake will have to paid for by the bank. However, since PSBs are owned by the government they do not have to worry about losses since they will always be bailed out if anything goes wrong.

PSBs can also afford to under-price loans and other services compared to their private sector counterparts. They are able to do this because of the low cost of capital for them, which in turn is because of the government guarantee and ownership. This leads to an uncompetitive market in the banking sector.

Lack of incentives

Top management and the Board of a PSB are bureaucrats and not career bankers. Since they have no skin in the game and don’t directly get affected by any changes in the bank whatsoever, they tend to be laid back with issues ranging from customer service to serious issues like fraud and security.

For instance, RBI had warned Indian banks about the financial risks emanating from the abuse of the SWIFT mode, asking banks to be extra cautious about the technology being misused. If Punjab National Bank (PNB) had been a private bank, they would not have been as callous as they have been in this case. Incentives matter!

Concentrated benefits, diffused costs

Benefits of the government running banks are enjoyed by only politicians, bureaucrats and cronies such as Vijay Mallya, Nirav Modi and Vikram Kothari, while the entire population pays for it.

Politicians and bureaucrats call the shots at PSBs which can be used to appease a certain section of people in exchange for votes and favours. Today, the Finance Minister can pick up the phone and ask any PSB to give out loans to any one particular person or community without any due diligence done. Of course, the rise in NPA due to non-payment of loans will be paid for by all of us.

No wonder that today bad loans of all Indian banks have surged to ₹ 9 lakh crore and most of that is from the public-sector lenders. The most recent ₹ 11,400 crore loss of taxpayer’s money should be the wakeup call for us. Or are we waiting for another poster boy after Mallya and Modi to show us that government should not be in the business of running banks?