Back to lazy banking

The law’s been clear. Nationalisation of banks was about control, not regulation

There is no need to restart the cliched debate on the pros and cons of bank nationalisation. Myth has it that nationalisation was required to improve credit delivery to agriculture and small-scale industry and establish branches in areas not served. If one looks further back, there was the spectre of bank failures between 1913 and 1948, when 1,100 banks failed. But since 1935 (nationalised in 1948), we had the Reserve Bank of India (RBI) and from 1949, we had the Banking Regulation Act. Weren’t these enough to address issues of regulation? It was under these that social control was introduced in December 1967 and a National Credit Council set up to advise RBI and government on credit allocation. Restrictions were imposed on composition of boards of directors and on bank lending to units that directors were interested in. If two All India Rural Credit Surveys of 1951 and 1954 still harped upon lack of rural credit and cooperatives and one strong commercial banking institution to drive these, Imperial Bank was nationalised and made State Bank of India (SBI) in 1955. One can’t get more imperious than Imperial Bank.

If it was credit delivery one wanted, there were sufficient instruments, without nationalisation of 14 banks in 1969/70 and six more in 1980. But then, credit delivery or populism of the late 1960s and early 1970s was only one part of the jigsaw. The preamble to the Banking Companies Act of 1970 stated, this was “an Act to provide for the acquisition and transfer of the undertakings of certain banking companies, having regard to their size, resources, coverage and organisation, in order to control the heights of the economy and to meet progressively, and serve better, the needs of development of the economy in conformity with national policy and objectives and for matters connected therewith or incidental thereto.” This preamble was again repeated in 1980, with Articles 39(b) and (c) of the Constitution thrown in.

The key word was ‘control’, not regulation. Opposition to privatisation of public sector enterprises isn’t about strategic sectors and market failure. It is about losing control. How else can one have loan melas or instruct banks to lend to preferred entities? The heights of the economy became the depths.

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On August 16, 2005, finance minister of state (S.S. Palanimanickam) introduced the Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions (Amendment) Bill, 2005 in Lok Sabha. He said, “With your permission, I may say that this is not adulteration. It will definitely strengthen the concept of nationalisation of banks. Even after these amendments, the nationalised banks will retain their public sector character with the government continuing as a majority shareholder. The government would continue to appoint the chief executive and other wholetime directors. It would also continue to nominate the non-official directors other than those elected by the shareholders. It would continue to approve the regulations to carry out the objectives of the Act. It would retain the power to issue directions in regard to the matter of policy involving public interest. Parliamentary control over these banks would continue as of now.”

Precisely. Let’s not think of shareholders and board of directors. Public sector banks (PSBs) aren’t companies under the Companies Act. They lost their company character with nationalisation. Whether government equity is 51 per cent or 33 per cent or 0 per cent is irrelevant.

The Bill became law in September 2006. Before that there was at least some semblance of independence, because shareholders (other than Central government) could appoint some directors. Without getting into the nitty-gritty of law, September 2006 wrought havoc in many ways. First, since government equity was declining and public shareholding increasing, the number of independent directors was slashed by half. Second, possibility of nomination from Sebi, Nabard and public financial institutions was removed. Third, the number of full-time directors was doubled (from two to four). Fourth, “excess” directors were made to retire, on a first-in first-out criterion, that is, on basis of seniority. Fifth, Sebi’s attempt to push corporate governance was a problem, since Sebi’s suggested draft amendment to Clause 49 of the Listing Agreement proposed that directors nominated by government or public financial institutions wouldn’t be counted as independent directors.

How about inserting a caveat to Clause 49? It wouldn’t apply to anything governed by a specific statute, such as PSBs. Regardless of whether the bank was listed or not, regardless of the extent of public holding, the Centre’s iron hand would rule over shareholders. Appointment and retirement of directors would be a government prerogative. Since February 19, when the requisite notification appeared in the gazette, 17 directors elected by shareholders have reportedly been asked to quit from 10 listed PSBs.

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Cast your mind back to February 2005, when finance ministry made a fuss about granting more managerial autonomy to PSBs by leaving assorted decisions (acquisitions, closure of unviable branches, opening overseas offices, human resource policies) to boards. The buzzwords then were “competition, corporate governance, and independent directors”. But those were early days of UPA. With the empire striking back, the buzzwords now are “government control” and government is not to be confused with governance. If interest rates can be dictated to PSBs, and whether these should be hiked, why not everything else?

A few years ago, Rakesh Mohan coined the expression “lazy banking” for what PSBs did. Abhijit Banerjee and Esther Duflo (of MIT) described their experience in a PSB in the following way. “Everyone we met seemed busy and the managers sounded like they knew what they were doing. We did notice that everyone’s desk was strewn with memos, circulars and bulletins, full of instructions, exhortations and prohibitions, but we still thought this was going to be different.” But that didn’t change anything, least of all credit delivery.

That was lazy banking for you. With UPA fast becoming an unproductive asset, is it surprising that lazy banking should be back? And to get lazy banking in banks, you need crazy banking in banking policy formulation. If we don’t want the expertise of independent directors, why are we surprised when directorship nomination turns out to be a matter of graft and reward?

The writer is an economist