From 1947 to 1955, 361 private
banks in India had failed, leaving depositors in the lurch. On the midnight of
July 19, 1969, 14 of the largest commercial banks in India, which accounts for
85% of all deposits, were nationalised. In the almost five decades since, we’ve
managed to stabilise and expand access to banking to the people. India now has
more than one billion bank accounts.
The argument for this drastic step was the delivery of credit. The
private banks would only lend to a select few large industries and businessmen.
In 1967, the lending to agriculture as a percentage of total lending was 2.2%,
and shrinking. Through nationalisation, the government could direct credit
towards the priority sector: agriculture, small industries, traders and
entrepreneurs.
But if you have read the news lately, you would think the public
sector banks (PSBs) don’t know how to distribute credit. From 2015, the Reserve
Bank of India (RBI) has changed the way banks report their non-performing
assets. This uncovered a mountain of bad debt, triggering the introduction of
the new Bankruptcy Code in 2016. The recent announcements by RBI have brought a
larger section of loan accounts into the new approach, which focuses on the
viability of borrowers. The apex bank has shown uncommon courage in pushing
forth to remove the scourge of crony capitalism once and for all. This
increases the pressure on PSBs to provision more losses, and on the government
to provide more capital. The Nirav Modi case has only brought more systemic
problems under the spotlight.
Most importantly, along with all the challenges of NPAs, systems,
human resources and governance, PSBs now also face a rapidly evolving
existential threat. Technology is a double-edged sword for finance. On the one
hand, it has greatly expanded access. Many of the 300 million Jan Dhan accounts
opened since 2014 have been enabled by Aadhaar electronic Know Your Customer
(eKYC). On the other hand, technology is inverting the banking business model
from low-volumes of high-value transactions at high cost to high-volumes of low
value transactions at low cost. This is primarily driven by the rapidly
plummeting costs of transactions brought on by the India Stack based on the Jan
Dhan, Aadhaar, Mobile (JAM) trinity. The dramatic move towards a less-cash
economy powered by the Unified Payment Interface (UPI) will further change the
competitive dynamics of the banking sector.
The failure of audit controls in the Nirav Modi case or NPAs also
demonstrates how not just transactional banking, but even audit that needs a
technological reimagining. It is possible to create a digital audit powered by
artificial intelligence (AI), which is real-time and preventive instead of post
facto and reactive.
But the rapid digitisation also means bankers, public or private,
have to engage in a cyber arms race they are not trained for with fraudsters
and hackers.
The opportunities and threats of rapid technological change thus
make it even more difficult for PSBs to cope.
And yet, despite nationalisation, India is still credit starved.
Our appetite for credit will only grow as GDP does. Moreover, low transaction
costs using digital, means it is feasible to serve customers that couldn’t be
served before. Credit in the economy will only deepen.
A recent Morgan Stanley report estimated the sector will grow from
$370 billion to $1.8 trillion by 2027. The same report estimates that in 2017,
PSBs will have a market share of less than 10%. PSBs will be left dealing with
their legacy issues, stranded assets and technology challenges, while private
banks and NBFCs respond nimbly, capturing most of that deep credit growth.
Given that financial inclusion and lending to the unserved is now
possible with technology, the arguments for a State-owned thrust further wither
away. The market knows these truths and today, HDFC Bank alone has a market
capitalisation higher than the top 22 government-owned banks combined. The
share of new loans issued by PSBs have dropped from 49% in 2014 to just 28% in
2017.
The argument for privatisation, then, is simple. It is already
creeping up on us, whether we like it or not. Technological disruption has made
it even more critical. By divesting from PSBs, and yet devising a way to keep
the upside of their future growth, the exchequer can still capture the value
that is inexorably being eroded from these banks. Privatisation is no longer a
question of if, but when.
Nandan
Nilekani is former chairman of the Unique Identification Authority of India and
is currently chairman of Infosys Ltd
The views
expressed are personal
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