KOCHI: Next year would be the 50th year of bank nationalization -a major economic policy decision taken by Indira Gandhi in 1969. Even though the immediate trigger for nationalization was political rather than economic, it was hailed as a progressive decision by many sections of the society. Many economists and finance experts had questioned the economic logic of nationalization.
Indira Gandhi and those who supported nationalization defended the decision by arguing that these banks were lending only to the rich and not to the broader sections of the society and that nationalization would change this. 49 years after nationalization, the nationalized banks are in a very bad shape by lending money to the rich business class, that too, unfortunately, to the fraudsters in business.SBI came into existence in 1955. 14 banks were nationalized in 1969 and 7 more in 1980. By 1994 mounting NPAs almost completely wiped out the capital of these nationalized banks and they were back in business only with massive recapitalization by the government at the expense of the taxpayer.
In recent times, the UPA 2 infused Rs 60,000 crores as fresh capital in the PSU banks. In 2015 the Modi government announced Rs 70000 crores of capitalization, out of which, Rs 50000 crores have already been given. As the NPA problem mounted, in a major recapitalization drive in October 2017, the government announced a huge infusion of Rs 13,5000 crores. In brief, during the last 10 years, the PSU banks have been allocated a massive Rs 2,65,000 crores.Is this throwing good money after bad? After some time, will another crisis grip the banking system necessitating another bout of recapitalization at the taxpayer’s expense?
The market is sending an important message
Market signals are hugely important. The market valuations (market capitalization) of private sector banks are significantly higher than those of PSU banks. Of course, private sector banks also have NPA issues. But the ratio of NPAs to total loans of PSU banks is 3 times higher than that of private sector banks. The market recognizes and rewards this superior governance of private banks.
Many readers will find this fact unbelievable: The market capitalization of HDFC Bank (incorporated in 1994) is higher than the combined market capitalization of all nationalized banks and SBI put together.
The market value of Kotak Mahindra Bank is equal to the combined market value of all nationalized banks, excluding SBI. The shares of 18 nationalized banks’ are quoting at a substantial discount to their book value. The discount to book value ranges between 14 percent in the case of Vijaya Bank to 74 percent in the case of Punjab and Sind Bank. The market cap of the 9-year old NBFC Bajaj Financial Services is higher than the combined market cap of 14m nationalized banks with decades of history. The market rewards governance and punishes mis-governance.
It is a fact that governance and performance are much better in private sector banks compared to PSU banks. But this doesn’t mean that they are free from scams and corruption. Globally, there have been many instances of private bank failures. The collapse of the Investment Bank Lehman Brothers contributed hugely to the global financial meltdown of 2008. The big scams in Royal Bank of Scotland, Barclays Bank and Bearings Bank are recent instances of private bank scams caused by greed and corrupt practices. Therefore, more than ownership, the issue should be control and regulation.
Better control and regulation needed
The PNB fraud points to a shocking failure of audit and control. The fact that one or few employees of the bank can bypass the core banking system and communicate through the international financial communications system SWIFT leading to the fraud of thousands of crores is shocking. Had there been audit of inter-bank liabilities, this could have been spotted early. Similarly, had there been a mechanism for intimating all SWIFT communications to the RBI, this would not have happened. It is important that we have to learn from experiences and take corrective actions. Crooks can come up with innovative ways of frauds. But better control, regulation and eternal vigilance can substantially mitigate frauds.
V K Vijayakumar,
Chief Investment Strategist, Geojit Financial Services.
The views expressed by the author are his own.