Banking is a business of trust. Depositors are the prime drivers. It is their money that the banks use, to lend to others and make a spread and make money. However, if some loans are not repaid, it impacts the depositor directly, when the magnitude of bad loans is far in excess of the capital that is brought in by the bank owner. Thus, it is the depositor who takes all the risk. In a PSU Bank, there is zero accountability. Bad loans make headlines and nothing more. However, the owner, who also owns the fiscal resources of the nation, pulls wool over our eyes when banks are ‘re-capitalised’. In effect, the govt uses our money to help repay our deposits. In other words, if our deposits have to be safe, we have to again put in capital to get the optical illusion that our deposit is intact. Frittering away our money in bad loans is theft. Unfortunately, no one is answerable. The politicians know that the best way to rob a bank is to make the government own it.
Nationalisation of Banks was the biggest fraud to happen on India’s finances. The politicians took control of public money and used it to feed friends and family, with zero risk to themselves. Excuses of “financial inclusion” , “job creation” etc are bunkum. Financial inclusion could have happened with SBI and the Post Office network together. It did not need other banks. What is the point in having 20 bank branches in one street? All that happened was that the businessmen gamed the system by borrowing from multiple banks, without the banks being able to get a fix.
Is privatisation of PSUs the answer? I think yes. Of course, history is full of private banks that went to the grave.. Global Trust, Centurion, Bank of Karad etc, to name a few. Of course, every cooperative bank is also bust and being kept alive with public money by the politicians.
We have seen banks go bust, whether private, public or cooperative. End of the day, bulk of the cheating is deliberate and cannot be done without political connivance. If bank promoters are chosen well, why should someone want to lose money? Banks like HDFC Ltd and Kotak have demonstrated that banking can be done well.
The government should merge ALL the PSU Banks in to one entity- So have SBI and one other bank. What this will do is to free up real estate that can be sold and help to shore up capital. Anyway there are enough private banks, NBFC etc that can fill in the gaps. The second bank can also be sold off to a foreign promoter or a willing domestic promoter. Cooperative Banks should be shut down.
Deposit Insurance should be increased to around 10 Lakh per account. Anyone keeping more than this can split it between a few banks. And if there is too much money, the person can learn to live with risk. Every citizen getting protection up to 10 lakh of own money should be more than adequate.
Private banks will collapse as risk management will fail and frauds will happen. This is a natural order of things. Let them happen. Make sure every bank pays the insurance premium for the Deposit Insurance. When NBFCs fail, no one bails them out. So should it be with banks.
The government can directly indulge with its extravagances by giving out loans to farmers, without touching the banking system. And make sure the RBI is packed with experience. Experience in banking and business. Not university professors and career politicians. Do not let anyone in to RBI if he has not worked in a bank for five to ten years.
The other thing that ought to be done is to have a centralised data base of all borrowers linked through PAN or some such number. This will help to prevent borrowers from going from bank to bank after defaults. If CIBIL can exist for retail borrowings, an equally robust system is needed for other borrowers. Every loan should be mapped in a central data base.
PSU Banking has to be killed. Otherwise we will have this endless cycle of recapitalisation. Politicians will resist. And I doubt if even Modi will be able to change this state of affairs.
Till privatisation, it would be best if PSU Banks are prohibited from lending even one rupee. Let them put the deposits they have in Government Securities. The return on G Secs is more than what they pay on savings or FD. So, they can make money without any risk. Keep our money safe. We have no faith in the banking system. Let the government get out of business. Cronyism is killing India.
Dear PM/FM- Do not fool us by saying that depositor money is “safe”. It is NOT. You are merely using tax payer money to fill the gaps created by your incompetence and connivance. It is like saying “ I will repay your loans by robbing you”