Home / Opinion / Columns /  Public sector banks: More sinned against than sinners

The Prime Minister announced India’s Jan Dhan Yojana (JDY) or National Mission for Financial Inclusion on Independence Day in 2014. A big part of this mission was to open no-frills bank accounts with zero minimum-balance requirements, which would also provide overdraft facilities and insurance cover to account holders. The catchy acronym of a ‘JAM’ trinity (i.e. the linkage of JDY accounts, Aadhaar identities and mobile phone numbers) was coined in the Economic Survey of the following year. This was the key for transferring government subsidies and financial support directly to beneficiaries, with minimum leakage and maximum efficiency. As of the end of 2021, there were a whopping 442 million beneficiary accounts, 295 million of them in rural branches and 147 million in urban centres. Their combined deposits have crossed 1.5 trillion, a fact tweeted proudly by the finance minister. The pace at which JDY accounts were opened in the first phase till the end of 2015 was breathtaking.

Indeed, on 20 January 2015, the scheme entered the Guinness World Records for its dazzling pace. This record was thanks to the tireless effort of mostly public sector bank (PSB) employees. Even as of December 2021, of the 442 million accounts, more than 97% were with PSBs or regional rural banks. Barely 12 million were with private banks. Indeed, the State Bank of India (SBI) alone has 132 million accounts. A very tiny proportion of these have zero balance, and many have over 10,000, according to a senior SBI official.

Did PSB employees get any bonus for over achieving this target set by the Prime Minister? Of course not. Recall those 50 days after 8 November 2016 when old currency notes were to be exchanged for new ones? In that small window of less than two months, more than 15 trillion in denominations of 500 and 1,000 had to be counted, verified and accepted, and exchanged for new notes of 500 and 2,000. Bank employees had to practically stop all other work and work late hours, for some well past midnight. Guess what? Much of this was accomplished by the unsung staff of PSBs in far-flung branches across the country. Demonetization may not have succeeded in rooting out black money, but it did prove the capability of Indian PSBs in executing a currency reshuffle on a truly massive scale.

JDY accounts are key to the successful distribution of various benefit schemes, such as the Pradhan Mantri Kisan Samman Nidhi scheme, Mahatma Gandhi National Rural Employment Guarantee programme, cooking gas subsidy and many others. The bank staff also have to sell insurance policies such as Jeevan Jyoti (for life cover) and Suraksha (for accident cover), as also the Atal pension scheme, all of which are products from the government or Life Insurance Corp. It is the bank staff who end up selling these products, since there is hardly any incentive for agents to do so. These products are important for achieving financial inclusion, which was part of a national vision enunciated in 2014. And the key to success, as also the main burden of these products’ distribution, rests chiefly with PSBs.

Even the success of the Emergency Credit Line Guarantee Scheme (ECLGS) launched in the middle of the pandemic to help micro, small and medium enterprises (MSMEs), has largely worked thanks to the networks and outreach of PSBs and their branches. According to an SBI report, around 1.35 million MSME accounts were saved from going delinquent, of which 97.3% were small and micro accounts, i.e. probably of the JDY beneficiary type, and hence held predominantly with PSBs. Further, 14% of MSME loans were saved from becoming non-performing assets and 15 million jobs were saved due to this relief package, according to the report. Here too, the role of PSBs is prominent.

There are several other examples of how they have played a key role in the “new welfarism" model of the government, including the big surge in the distribution and usage of RuPay credit and debit cards and the disbursement of crop insurance, both of which have an element of government subsidy. The Centre, for example, has mandated a zero merchant discount rate on the use of RuPay cards, which raises their attractiveness and usage.

Let us step back from JDY anecdotes to the big picture. Finance in India is still bank dominated. But the share of loans and advances of PSBs had declined from 71% in 2015-16 to 59% by March 2021. There has been a similar drop in the share of deposits. During these years, there has been consolidation of PSBs, from 27 down to 17, and the elimination of hundreds of branches.

If you use the return-on-assets metric or net non-performing asset ratio, PSBs usually lag private sector banks. It can be argued that they would fare much better if they were given real functional autonomy in their loan, recruitment, salary and reward decisions. For instance, their ratio of the CEO’s salary to that of an average employee is just 3, as against 67 in private-sector banks.

Would India be better off with wholesale privatization? With a well-known PSB only recently having been forced to take over one (or two) failing private banks, the obvious answer is ‘no’. Even partial privatization of PSBs needs a wider debate in a country where three-fourths of the banking sector is saddled with social objectives in addition to commercial ones. For now, just acknowledging the herculean contribution of India’s public sector banks will suffice.

Ajit Ranade is a senior fellow, Takshashila Institution

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