One way, not being officially considered now, but which worked partially in the past, is to let things lie. As the economy recovers and corporate India's fortunes along with it, the NPA problem will cease to be the big issue that it is right now. But there is a problem. The economy is already booming. If corporate sentiment and investment do not recognisably pick up when the economy is projected to grow at seven per cent plus for the third year running, particularly when the rest of the world is lagging far behind, there is a problem somewhere else. Such growth prospects during the United Progressive Alliance I & II or even the National Democratic Alliance I would have had businessmen rejoicing. Either there is something wrong with the GDP (gross domestic product) figures - they have massive discrepancies - or the root cause of bank NPAs lies elsewhere.
There may be something intrinsically wrong in the way PSB managements shape so that any solution currently being devised can only be a temporary fix. Current solutions will take care of the stock of NPAs, not the flow. Over time NPA pileups will return to haunt the system because the system, the way bank managements are chosen and have evolved, is broken.
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While aspirants for top positions lobby with the powers that be, powerful business interests also lobby for their own candidates. Once such an aspirant makes it to the top tier, it becomes payback time. This has over decades created a management culture in these organisations that is not professional and under which managers down the line taking tough decisions are often not backed by their superiors who think of their own careers and not the health of the organisation first.
There are, of course, exceptions. At any given time, State Bank of India will likely have a better top management than any other PSB. The political culture prevailing when it was nationalised ensured that the finance ministry put in place a constructive way of supervising it. The same was tried after 1969 but did not survive, D N Ghosh points out in his memoirs. Depth of management skills and own ethos do exist in exceptions like Bank of Baroda. But unfortunately, some PSBs, which a couple of decades earlier were considered to be distinctive like Corporation Bank, have by now become undistinguishable from the rest.
It is inconceivable that the political culture in the country will change so much in the foreseeable future as to allow PSB managements to become and remain professional. With no political will to stop the use of unaccounted money in elections and defections continuing to be organised and state governments being toppled, it is only a matter of time before the present dispensation acquires the sins of the ones of the past.
The only way out for the government is to get out of PSBs. This does not mean the technicality of letting its shareholding go below 51 per cent. In such a situation, if there is no identified promoter in place taking ownership of the management, things can actually get worse. The same politicians and bureaucrats will still be running the show without the oversight of official vigilance.
A political consensus for bank privatisation does not exist even within the present ruling party, not to speak of others. So the undeclared strategy for the next few years can be: shore things up somewhat so that offers for sale later get half decent bids. But even that is doubtful. The banks have little to recommend themselves. About the only valuable they can call their own is their depositor base. Large legacy branch networks no longer matter in the age of digitised branchless banking.
Perhaps the biggest reason why PSBs do not have a future is the way the RBI has cut the ground from under their feet. Their payments business will over time be severely eroded by the payments banks. More importantly, PSBs have made little use of the space, open to them for decades, to bring about financial inclusion. The small finance banks, which know how to give small loans successfully, will take away that space. Once they get on with their business, the developmental role of PSBs will end.
What segment of business does this leave PSBs with? The healthy big corporates do not need them for large-ticket financing. Disintermediation is now well entrenched. There will be some healthy medium to large business which the banks have nurtured in the past, but these could migrate anywhere. Thus, about the only large accounts which will not go away are the infrastructure projects which are at the root of the current NPA mess. We may not be able to hear it right now, but the bell has begun to toll for PSBs. The government has only one option: plan and organise its exit as systematically as possible.