Public sector banks turn a profit but privatisation not on cards for now

This presents a neoliberal dilemma as the government needs them to support crony capitalists and derisk private investment in infrastructure.

Published : Jun 02, 2023 15:59 IST - 6 MINS READ

Outside a State Bank of India branch in Kolkata. The country’s top bank posted an 83 per cent rise in net profit for the quarter ended March from the corresponding previous period.

Outside a State Bank of India branch in Kolkata. The country’s top bank posted an 83 per cent rise in net profit for the quarter ended March from the corresponding previous period. | Photo Credit: RUPAK DE CHOWDHURI/REUTERS

The government’s economic spokespersons have been celebrating an ostensibly remarkable recovery in the country’s public banking sector. The evidence does suggest that public sector banks (PSBs) have registered a turnaround. Not too long ago they were suffering losses, had accumulated large non-performing assets (NPAs) on their balance sheets, and were being spurned by yield-hungry stock market investors.

The PSBs posted combined losses of Rs.85,370 crore in 2017-18, Rs.66,636 crore in 2018-19, and Rs.25,941 crore in 2019-20, adding up to an aggregate of nearly Rs.1.78 lakh crore over those three years. Those losses gave way to profits in subsequent fiscals, with the size of aggregate profits reaching Rs.66,543 crore in 2021-22 and growing to an estimated Rs.1 lakh crore in 2022-23.

A noteworthy feature of this trend is that the spike in losses occurred before the COVID-19 pandemic, and that despite being called upon to support the government’s COVID response with credit, the PSBs were able to turn a profit.

Quality of assets

Underlying this unusual tale is the sudden rise in NPAs in the years starting from 2016. NPAs on the books of banks ballooned after the RBI issued new guidelines for asset quality recognition (AQR) in 2015. The ratio of NPAs to advances rose from 5 per cent in 2014-15 to a peak of 14.5 per cent in March 2018. Banks were forced to provide funds to cover for these bad assets as per RBI guidelines, resulting in large losses.

Over 2017-18 to 2019-20, gross NPAs rose by Rs.59,107 crore, whereas net NPAs fell by Rs.1,13,572 crore. This means that provisions amounted to Rs.1,72,679 crore, compared with cumulative losses of Rs.1,77,947 crore recorded during the period. Clearly, provisioning played a role in generating the losses.

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It was to be expected that once legacy NPAs had been provided for, the losses would be limited. The clean-up that followed the AQR brought the NPA ratio down to 5.5 per cent by December 2022. This was also the time when the economy was recovering from the effect of the pandemic and the government’s responses to it. A revival in spending allowed banks to expand their retail lending, where yields are higher and defaults much lower than in areas such as lending to infrastructure.

The result of such trends was the turnaround and subsequent surge in profitability. Financial investors too responded positively to these developments. The total market capitalisation of PSBs rose from Rs.4.52 lakh crore in March 2018 to Rs.10.63 lakh crore in December 2022.

A variety of stakeholders contributed to the turnaround. The banks took on board losses. But that meant that the government, as dominant owner of the PSBs, carried a large share of the burden. In addition, to ensure the solvency of and capital adequacy in the banks, the government had to infuse large volumes of capital into the public banking system.

The government had infused a total of Rs.3,10,997 crore from 2016-17 to 2020-21. That forced spending created liabilities, the costs of which had to be borne by taxpayers.

As the experience in the advanced countries during the 2008 financial crisis and the more recent banking crisis involving Silicon Valley Bank, Signature Bank, Credit Suisse, and others has shown, it has become normal under capitalism for the state to bear the cost of resolving such crises. So, one cannot protest too much if, in India, government resources are used to shore up public (and not private) banks.

  • The PSBs posted combined losses aggregating nearly Rs.1.78 lakh crore between 2017-18 and 2019-20.
  • The ratio of NPAs to advances rose from 5 per cent in 2014-15 to a peak of 14.5 per cent in March 2018.
  • To ensure the solvency of and capital adequacy in banks, the government had to infuse Rs.3,10,997 crore into the public banking system from 2016-17 to 2020-21.
  • Private investor interest in banks is likely to revive but that does not imply that banking privatisation is now inevitable.

Financial reform

However, there is one danger. Ever since the release of the two Narasimham Committee reports on financial reform in the 1990s, it has been clear that privatisation of public banking has been a prime objective of neoliberal financial reform.

The pursuit of this objective has been stalled by a number of factors, besides political opposition from within and outside the industry. The process was held back by, among others, the requirement that banks should undertake social lending on a priority basis, with attendant adverse implications for profitability; the presence of NPAs on public bank balance sheets; and the government’s fear that the dampening effect of these factors on the market value of PSB equity would disproportionately affect the price at which they could be sold.

However, privatisation remains a part of the class project that neoliberalism represents, involving capture of the state and moulding of policy for the benefit of the richest. And it is indeed possible that the balance sheet clean-up and consequent improvement in profitability of public banks will make the clamour for privatisation louder.

Private investor interest, which had slumped when the balance sheets of the PSBs were burdened with NPAs, is likely to revive. The improvement in market capitalisation will allow the sale of public shares at prices that would be defended as reasonable. And the rise in profitability would spur investor interest.

But that does not imply that banking privatisation is now inevitable. As has happened before, profits can fall and NPAs can once again rise. Even if that does not happen, privatisation may not be an unambiguously pursued goal of the government.

Public banking and neoliberalism

In the Indian version of neoliberalism, privatisation is not the only route that neoliberal banking policy has taken. Rather, with hindsight we know that a neoliberal state can use public banking as an instrument to further its neoliberal agenda. Recognising that left to itself the private sector will not deliver the infrastructural investment seen as crucial for the success of a neoliberal growth strategy, the government had to remain engaged with the project of building infrastructure.

But given the lenient direct tax regime and the fiscal conservatism characteristic of the neoliberal era, the government found itself incapable of financing the necessary investment.

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In the circumstances, the government chose to use public banking not as an instrument to pursue social objectives but as a means of incentivising private investment in infrastructure. That was the strategy pursued during the years of the credit boom starting around 2003, which led to the burge)s)oning of NPAs in the banking system. Privatisation would foreclose that choice.

But the pressure to use public banks as instruments to incentivise and derisk private investment in infrastructure remains. This contradiction between the neoliberal aim of privatising public banking and using public banks as instruments to redirect national savings to favour corporate investment in capital intensive areas, especially investment by a chosen few “crony capitalists”, makes privatisation a difficult ask even for the neoliberal state.

That is part of the explanation why, more than three decades after the first Narasimham Committee report, the objective of banking privatisation remains unfulfilled.

C.P. Chandrasekhar taught for more than three decades at the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi. He is currently Senior Research Fellow at the Political Economy Research Institute, University of Massachusetts Amherst, US.

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