Column: Govt must let go of its hold on PSBs

Apr 02 2014, 03:05 IST
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SummaryThe government has two options: either privatise the PSBs or design a radically new governance structure for them

In India socialism thrives thus: first, create the scarcity through governmental control and then, the government doles out the scarce thing. People are brainwashed into thinking that since the government is the source of the supply, it (the government) must be the benevolent entity in the economy; therefore, all efforts must be made to keep on the good side of the government so that it can come to ‘rescue’ with some of the scarce good.

The story of public sector banks (PSBs) is also something similar. There is a scarcity of bank capital which got created because of the inefficiency and maladministration of the government, either explicitly or implicitly. The government doesn’t allocate as much capital as is needed. It doles out a few thousand crore each year which seems large in absolute terms, but is a pittance in the banking world. It doles so little because, allocating money to a Rozgar Yojana gets the electronic voting machine ringing, but earmarking badly-needed resources for the good health of the PSBs hardly humours the electorate. Chronic non-allocation of capital due to high-degree myopia and short-termism creates scarcity. When the problem become endemic, the government comes as a knight in shining armour and ‘rescues’ the PSBs.

The story of Air India is analogous and helps in understanding the current problem of the PSBs. Air India wouldn’t have been such an inferior airline but for the government. After continued negligence, maladministration and bungling, the government finally comes as the ‘rescuing’ knight. It comes across as the all-compassionate benevolent entity in times of trouble and therefore must be good for the airline and the economy. We forget that Air India would not have been in trouble in the first place if the government hadn’t made such a mess of running it.

It does sound quite panicky, but a not-so-well-known reality is that PSBs in India are experiencing significant distress and suffer from thin bank capital. Exacerbating the problem is low investor confidence in PSBs, highlighted by the equity issue in January 2014 of State Bank of India—the bellwether for PSBs. SBI sought to raise R9,600 crore via a share sale to institutional investors in the domestic market. However, it could raise only 80% of that amount, R8,032 crore. Even that 80% transpired only because 41.3% of the issue was bought by the state-owned Life Insurance Corporation of India. Foreign investors largely stayed away from the offering. If

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