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Privatisation of state-owned banks is not a solution to the bad loans mess
Ajay Garg

Following the Punjab National Bank fraud involving Nirav Modi, we have witnessed a huge clamour for privatising public sector banks. There is also a big debate over why the taxpayers’ money should be used to recapitalise public sector banks.

Over the past decade or so, the divide between public sector banks and private lenders have shrunk considerably, with significant improvement in the quality of services offered by state-owned entities. However, I am of the view that the issues that plague PSBs today, is equally valid for banks in the private sector.

Like their state-owned peers, the bad loans mess of large private-listed companies clearly show that governance levels and audit mechanisms have failed to address instances of unauthorised diversion of funds. We have also seen enough instances of frauds, and in equal measures, at private institutions.

Basically, human ingenuity exists around figuring out how to beat the system. As we grow our markets and the economy, we have to ensure ingenuity is not used by a few to play the banking system.

We must also ensure that irrespective of wherever the scam happens, the entire board and management should go, along the lines of the Satyam case. It is one of the most effective redressal of corporate fraud. You simply cannot have the same management or board investigating the fraud. It will not only delay the fact-finding process, but will also compromise the management’s ability to punish the culprits.

Enforcement agencies need to have specific teams to deal with financial frauds, and develop the ability to investigate and penalise the perpetrators in quick time. Significant steps have been taken on that front with the government charting out the rules in terms of the role of the Board and its members and, hopefully, as they get implemented in earnestness, the quality of governance will improve.

What really bothers me is that the high-decibel noise around privatisation of PSBs should not result in state-owned institutions being sold off for a song. They are fundamentally very strong franchises and if the government decides to sell them, it must be done by giving the management team the tools to rebuild the inherent value that exists.

The current salary levels for PSB staffs are at an unsustainable level for decent metro living. I have seen the ISRO programme and, believe, that some of the finest enterprises can be created in the public sector domain. Therefore, I would really like to see PSB franchises are not being sold in a hurry and at the current undervalued rates.

This may be utopian thinking, because in a democratic setup there seems to be action only when there is media pressure, as a function of some bad event or when the losses are huge. One would hope that the disinvestment programme recognises this and, as a custodian of public monies, have clarity on the assets they would like to divest and the assets they would like to keep.

Assets that needs to be divested, have to be aggressively sold when they are doing very well, rather than forcing a sale when the value is at a fraction of what its true value is. India has some of the smartest fund managers in the world and the divestment programmes should use their skills for maximising the value of the franchise.

The author is the managing director of full-service, mid-market investment bank Equirus Capital Pvt. Ltd.

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