There are fundamental objections to the plan of the government to privatise at least some of the public sector banks. They center around the fact that such a move will change the pattern of deployment of credit, away from productive activities towards speculation, away from peasant agriculture to big business (with dangerous implications for peasant viability, food security, and employment), and away from domestic to global destinations. These objections are well-known and have been much discussed, and their pertinence has been underscored by the fact that Indian public sector banks were completely untouched during the “sub-prime-lending crisis” of 2008. Still, the government, concerned more with pleasing domestic and foreign big business than with the nation’s well-being, predictably ignores them. The purpose here however is not to reiterate these objections; it is to point to another danger from privatisation that has been less discussed and which the country can ill-afford to ignore.
With “liberalisation” however this entire arrangement changed. The earlier specialised financial institutions disappeared in their old form, some like IDBI converting themselves into banks. Long-term financial needs of units were now supposed to be met through the capital market, from where also whatever financial institutions existed for giving long-term loans, were to raise their funds. But if an investment project was not profitable enough, or was too risky, then capitalists, instead of approaching the market, started approaching public sector banks even for long-term loans. And the banks have ended up giving large loans, especially for infrastructure projects, with the government pushing them to do so. As a result, the public sector banks, precisely because the government can arm-twist them into giving the loans it wants them to, have developed balance sheets that portend danger. Banks obtain their resources from the deposits of the public which the public can withdraw at a moment’s notice. If a significant part of these resources is used for loans for long-term investment, the banks are “borrowing short to lend long”, which exposes them to a potential illiquidity crisis.
The public sector banks have not just given loans for the acquisition of long-term assets; much of the loans they have given are for infrastructure projects, which have a long gestation period, where time and cost-overruns are common, and where profits appear, if at all, only after a long period. The fact that a good part of such loans can be counted among the “on-performing assets” of the banks should come as no surprise. But even that part which is not officially counted as NPA nonetheless falls under the category of “stressed assets”. Thus, the public sector banks have been pressurized by the government, not just into giving long-term loans but into giving “stressed loans”. They are in short sitting on top of a volcano that can erupt at any time. The reason it has not yet erupted and continues to remain dormant is that these banks are government-owned; the public whose deposits have been used for such financing is not panicky: it has the confidence that if the banks face a crisis, the government that owns them will necessarily come to their rescue. And this confidence is precisely what prevents the banks from facing a crisis.
