Last week, a senior executive of a private bank was livid about an unusual demand made by CEOs of public sector banks.
“How can they make such a silly demand? Let the market forces determine… They should not ask for such favours from the government through the backdoor,” he told me. The executive was referring to the demand made by the public sector bank CEOs at a recent meeting with finance minister P. Chidambaram. Some of these banks last year had offered over 12% interest on bulk deposits. When the finance minister asked the bank bosses to stop this practice, they blamed competition for jacking up the rates. They also requested Chidambaram, who represents the owner of the public sector banks, to make it mandatory for all Union government undertakings to park their funds with them.
Can the banks make such a demand?
I checked with some of the CEOs who attended the meeting and found that indeed they had mooted such a proposal. And, they were not embarrassed. “What’s wrong in this? The government owns the public sector banks and also owns other public sector outfits. As an owner, it can always direct its undertakings to deposit surplus cash with its banks. This is not against market economy. On the contrary, if the government undertakings do not keep deposits with public sector banks, it’s a grave injustice,” says Indian Bank chairman K. C. Chakraborty.
A former CEO of a Mumbai-based public sector bank offers a different reason. “These government organizations need to see the risk-return ratio. They can get a little extra from private banks, but those banks are not backed by any sovereign guarantee. So, there is risk. If they want risk-free good return, they should keep their money with public sector banks. This does not violate the spirit of market economy,” he says.
Essentially, these public sector bank CEOs want to have their cake and eat it too. They don’t want to pay high rates on deposits; at the same time, they want money in their kitty as without funds they cannot build their loan assets. So, they want a fiat from the owner, directing the government undertakings to keep their money at the state-run banks, even if that means earning a little lower interest.
Beneath the veneer of “owner-has-the-right” and “risk-return” theories, they are actually making a counter demand to the government for many unreasonable demands that the government, as owner of these banks, has historically been making. Let’s take a look at some rituals that state-run banks need to undergo regularly where private banks fear to tread:
CBI, CVC: Each commercial decision—from clearing a Rs100 crore loan proposal to placing a Rs500 crore order with a software vendor for computerization of branches—taken by a public sector bank chief can be scrutinized by investigative agencies. This creates a fear psychosis and slows the decision-making process. On the other hand, private banks are board-driven; not answerable to any external agency.
Education loans: The burden of higher education of every Indian who wants money is on public sector banks. These loans do not offer high return, but the banks need to be in this space as part of their social responsibility.
Farm loans: Public sector banks must make loans accessible to farmers. Nothing wrong with that per se but the story does not end here. They must offer such loans at an interest rate determined by the finance ministry. These loans are given at 7% with a 2% subsidy thrown in for the banks. But that’s not even enough to cover even the cost of funds.
Home loans: The state-run banks are under pressure to cap the loan rates to ensure that housing needs of the poor are met. This is despite the rising cost of funds. Private banks have no such compulsions.
Parliamentary committees: Public sector banks are required to entertain various parliamentary panels at regular intervals. These panels can grill bank CEOs on any subject, ranging from offering loans to small industries to jobs to women and minority communities. On an average, the CEO of a bank meets 18 such committees a year, around India.
Hindi: State-run banks are required not only to teach their employees the Hindi language but also circulate a Hindi version of all office notes.
Right to Information Act: Under this, anybody can ask for information from a public sector bank. The subjects can vary from how much loan a bank has given to a particular corporate house to how many times its CEO has travelled abroad. All banks have special divisions to answer such questions.
Remuneration: The CEO of a public sector bank earns as little as 5% of some of the private sector bank chiefs. Ditto for their employees. They can neither retrench their inefficient staff, nor replenish stock by hiring from the market.
Reservation policy: Public sector banks have to follow the reservation policy and offer jobs to the minority communities, scheduled caste and tribes and physically challenged.
These burdens cripple the performance of public sector banks, though these banks, like their counterparts in the private sector, are listed and answerable to their shareholders.
So, in demanding preferential deposits, they are not asking for the moon from the government. But such small concessions are like using a Band-Aid to heal a fractured limb.
The best way of addressing the problem is to bring down the government shareholding from 51% to 49%. Once this is done, the chief executives of public sector banks will stop begging for such small mercies and fight competition on an equal footing.
(Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to firstname.lastname@example.org)