Privatize PSBs else be ready for another Choksi & Modi!

Another Mehul & modi episode will strike if our government will continue with 21 PSUs.

Over the last one week, PNB fraud by diamontaire Nirav Modi & Mehul Choksi is trending above all hash tags across media. More & more people are coming out with their own methods/recommendations of how we could’ve prevented this massive scam. No doubt, finding out the cause is the need of the hour but the main problem lies somewhere else. PNB is not the first public sector bank who got a whole of Rs 11000 Crore in its pockets and it’s certainly not the only one.

Now there are few problems which engulfed PSBs over the last few decades and due to this they are grappling with never ending issues and they are:-

1. No Authority/ Responsibility/ Incentive:

In PSBs, employees are rarely gets promotion. Take example of GokulNath Shetty, the main accused in the PNB Scan who offered fake LOUs to the Nirav Modi’s group companies.  He had retired from PNB after 36 years of service. In those 36 years only once he got promoted.  In PSBs, employees rarely gets promoted based on their promotion. Even they do not have fear of getting fired for non performance. As a result, lack of motivation plays a pivotal role in putting a barricade on the minds of employees which eventually stops thinking and that result in lack of innovation. They do not bring up news ideas on the table. Due to lack of innovation & creative thinking, there is little chance for employees to make good decisions. On the other hand, in a privately run bank, lack of not doing new things is itself a crime and overstepping lending parameters would lead to losing a job.  In case of PSBs, both the stick and carrot ( in the form of punishment & reward) have been missing.

2. Rising number of Frauds:-

In a recent report of willful defaulters compiled from CIBIL database says that the total amount of outstanding on the loans which are above 25 lakhs in which law suit have been filed have grown exponentially from Rs 28416.93 crore as of September 2013 to Rs 1.11 trillion as of 30 september 2017. Within four years, the amount has been growing at a CAGR ( Compound annual growth rate ) of more than 40%.

Till September 2013, nationalized banks had a share of 32.8% of the total amount outstanding in the willful defaulters list. After four years, this share had gone up to 58.7% The CAGR of the amounts in these accounts with nationalized banks was a eye popping figure i.e. 62.92%. For PNB its CAGR was 95.13%

3. Lack of systems & Low Pay Scale:-

The main cause behind the PNB Scam was the breach of three levels of security & checks which every bank does to prevent frauds. Many PSBs are depriving themselves to get latest technology & implement them to prevent wrongdoings & scams. They have no incentive linked to this. In this case, SWIFT ( Society for Worldwide Interbank Financial Telecommunication code) system was not linked to the CBS ( Core Banking system ) of the PNB. That’s why the entries of the LOUs which were issues by those two officials of PNB were not entered into the system and due to this it went unnoticed over the last six years. Other than SBI and Private Banks, I don’t know whether all PSUs had integrated their SWIFT system into their CBS. The management of the  PSB does not get paid well as compare to their private peers. You can easily find out the salary figures of top CEOs of PSBs & private Banks  and you will witness that it’s a gigantic difference in terms of pay scale. These poorly paid bureaucrats with no incentive failed to install a system to check links & balances. PSBs systems are more vulnerable to frauds as they are not updated with the latest technology. For instance, Kotak 811 account, it is a fully digital zero balance account which any one can open within two minutes by having one aadhaar number and a pan card. How many of the PSBs offers such kind of offerings to its customers? They don’t pay heed to their customers. A simple request for debit card change would take weeks to solve & deliver it to the customer’s registered address. Private banks are more responsible for their depositors, investors, owners while on the other hand PSBs are just guzzling tax payer’s money which is like a limitless resource for them to cover all mistakes.

4. Political parties:-

Have we ever asked anyone why several governments like Vajpayee, UPA, NDA didn’t reverse bank nationalization decision which was taken in 1969 despite being heavily relied on private sector banks for steel & power projects?  We have witnessed decisions regarding sale of Air India, Bharat Earth movers Ltd ( BEML ), HAL ( Hindustan Aeronautics Limited ) but not banks. These governments are not willing  to give up their control over PSUs.

One of the reason behind this is that PSBs are like a cheap credit facility for netas to run their risky businesses in exchange for campaign finance. They use this resource & later on pass that bill to the tax payers and this will keep on continuing till the time another government comes to the power. If in case any PSU hit with a scam then recapitalization will take place in which they inject tax payers money into the coffers of PSBs. Recently, ace investor Mr. Rakesh Jhunjhunwala also said that we only 3 PSUs. We simply do not require 21 PSUs. Today if you look at the combine M-Cap of all 21 PSBs together it is less than that of HDFC, India’s largest private bank.

This scam is a wake up call for the government to take a radical decision by reversing bank nationalization policy by selling the government stake & exit the business.