The collapse of some of America’s largest banks including Lehman Bros, Bank of America and the deep troubles of the globe-girdling Citibank following the subprime mortgage and associated scandals in the US, has prompted considerable self-congratulation that India’s banking system dominated by 28 public sector banks, has survived the crisis that has shaken global banking.
Yet the plain truth is that if India’s nationalised public sector banks (PSBs) have weathered the global financial tsunami, it is less attributable to the prudence of regulators of the Union finance ministry and the Reserve Bank of India, than to the fact that the bureaucrats who staff India’s PSBs are pathologically risk-averse and naturally reluctant to lend. It’s hardly a national secret that the major motivators of PSB managers are a well-phrased bribe or a call from the finance ministry in Delhi. For bona fide borrowers, especially from SMEs (small and medium enterprises), all they have to offer is bewildering paperwork and a plethora of rules and regulations which defeat even the most determined and desperate entrepreneurs.
To show healthy balance sheets, risk-wary managers of PSBs — most of them promoted clerks — are content to purchase safe government bonds. Heavily dependent upon elaborate rule books and guidelines issued by finance ministry babus, they are strangers to the science of project and especially people, appraisal.
Therefore if PSBs haven’t come tumbling down like American and European banks, where managers take profit-driven risks after people and project appraisal, it’s not prudent management as much as their timorous, bureaucratic banking practices. Proof of this is provided by the statistic that a mere 15 percent of the citizenry have bank accounts, and an even lesser percentage has ever availed a bank loan.
At best India’s nationalised banking system is a successful failure or failed success. If PSBs seem to have survived the global economic meltdown, it’s because of their natural hesitation to lend and risk aversion, rather than business acumen.