Sub Motions
1. Nationalization of banks in 1969 was a mistake
For the Motion (Prachi) –
Nationalization of banks which happened in 1969 can be contrasted with the recent current scenario where government announced demonetization. Both these policies where favored to eliminate poverty and change the structure of the economy. But they failed in the process of implementation. The nationalization of banks was announced without even informing the then finance minister of the country, Morarji Desai. This very fact reflects that this was not a pure economic intention of the then political party in rule but was a political masterstroke for the next election. Though, nationalization tried to deepen the financial sector to the interiors of the country, but today we stand on the same platform. The whole argument stands on the point, that if nationalization could have achieved all this then why are we even after 5 decades on the same level. PJ Nayak committee mentions that, it would be better if government banks are under companies act. One of the senior executive of a nationalized bank said, “Nationalization has snatched the incentive to work and to create.” Even if we look economically, it has increased the expenditure of the government, inadequate banking facilities, limited resources and political and administration interference. Frauds in PSB’s have led to heavy overdues on the bank. The bureaucracy in the banks has made the working of the government inefficient and cumulative effect of their growth has not been very significant.
Against the Motion ( Parush) –
Hindsight bias makes people believe that an event in the past was much more predictable than it actually was. Given the access to information we have in the present, a policymaker in the past might not have had the same and his decision at that time might be apt given the situation he/she were realizing. To understand the reason behind the decision, one must compare India of today with India of 1969. GDP per capita in 1969 was 400 US$ and today it is 1850 US$. GDP growth rate in 1969 was an average of 3% while today the average is 7%. Headcount ratio in 1969 was 60% whereas today it is 20%. Hence, a financial system was needed which will cater to the demands of small businesses, rural and agricultural sector.
Post independence, around 600 private commercial banks were in place across the nation but they were catering the needs of working capital requirements only. Because of their sole purpose of profit, rural agriculture was highly financially excluded. So, in 1969, Government decided to nationalize 14 large banks to take care of the welfare objectives.
One might argue that public sector banks are a burden on the government and the inefficiencies are inherited. That is not the case because Industrial and Commercial bank of China Ltd is the largest bank in the world in terms of net assets and first on Forbes list in the year 2000. In the present India, conundrum of NPA’s and scams are due to weak regulatory institutions and improper implementation of policies rather than the public ownership of banks. So, claiming the nationalization policy to be a mistake is not justified.
2. We should replace the machinery rather than tighten the screws
For the Motion (Swagata) –
i) Basel 3 requirements: Public sector banks infeasible in the long run without continuously scaled recapitalization. Minimum capital requirements not met. NPAs hidden by restructured assets under regulatory forbearance and provisioning by RBI. LIC eating up bad debt on a regular basis; ii) Systemic risks of PSBs: Debt liabilities steeper for PSBs, mentioned that if the 4 largest privates acquire 10 weakest public, 5 billion $ surplus value generated; iii) Profitability: Under all criteria generally used (Return on Assets, Equity, Net Interest Margin, Market-to-book ratios, asset quality, gross NPA ratios). Restructured assets 8 times higher; vi) Organizational inertia, lack of efficiency by several metrics due to implicit sovereign guarantee, Nilekani (PSBs shrinking to 10%, growth rate of private deposits higher); vii) Volatile wholesale liabilities fund asset growth; viii) at the height of 2002 onwards, boom, PSBs lent extravagantly to not only developmental sectors (infra, minerals, power) but to private over-exuberant players; fallout seen today in wider exposure to scams, lack of rational expectations that growth would stagger; ix) If goals of PSBs argued to be different, (a) should not be categorized as commercial banks, and (b) niche banking, microfinance, specialized banking done along private lines more effectively implemented; x) argument that they penetrate rural, credit-less India dying swiftly with digital expansion and realization of privates that an untapped market lies in wait; xi) PSBs cannot borrow from abroad as weaker market valuations; xii) Dual recognition by FinMin and RBI hampering productive decision-making; xiii) Higher advance frauds; xiv) lower efficiency due to human capital gaps, average age of talent pool 43 as opposed to 32.
Against The Motion (Tuhin)
Maximum stress in the NPAs today has been faced by industries and infrastructure sector, with greatest burden falling on Public Sector Banks. Most of the gross NPAs have been contributed by a few large borrowers.
Raghuram Rajan in his speech at Assocham, 2016 said “ There are 2 sources of distressed loans- the fundamentals of the borrower not being good and ability of the lender to collect being weak. Both are at work in the current distress.”
To improve the ability of the lender to collect, the government has institutionalized the Insolvency and Bankruptcy Code, 2016. It has also come up with the scheme to recapitalize the banks to the tune of Rs. 2.1 lakh crores. The government has recently passed in the cabinet Fugitive Economic Offenders Bill, 2018 to deter Economic Offenders from evading the process of Indian law by remaining outside the jurisdiction of Indian courts, thereby preserving the sanctity of rule of law in India.
Hence, the problem irrespective of ownership of banks lies essentially with the legal systems in place to counter the NPA issue or offences committed.
Secondly, the overview of P.J. Nayak Committee on Review of Bank Board Governance Reforms in 2014 published by the RBI gives the external constraints on PSBs with regards to the dual regulation of RBI and government, board constitution, external vigilance enforcement through CVC and CBI and the limited applicability of the RTI. These constraints hinder the lending ability of the banks as well as their internal governance frameworks. However, the report mentions that if the government stake in banks is less than 50% combined with other executive measures, these external constraints would disappear.
This would be a beneficial trade-off for the government because it would continue to be the dominant shareholder and without its control in banks diminishing, it would create the conditions for its banks to compete more successfully. It is a fundamental irony that presently the government disadvantages the very banks it has invested in. Hence, what my opponents fail to understand is that changing the ownership of banks is essentially not required to counter the current NPA issue in PSBs. Simply decreasing government stake would be one of the important measures to resolve the issue.
3. Privatization is better than Mergers
For the Motion (Devanshi)
India in recent times has witnessed mergers of various public sector banks like SBI. Mergers are undertaken with the main aim to bring economies of scale and scope, cost saving, diversification of customers and assets, etc. But most of them have failed to justify their existence. For instance- Merger of SBI is a matter of concern as merger has transformed SBI into such a large entity that it can lead to a problem of Too Big To Fail. Failure of such a large entity can have macroeconomic implications. Post mergers gross NPA's, net NPA's, credit cost, slippage ratio also tends to rise. The number of scams in public sector banks is more than that in private sector. Privatisation of banks is the only way out for healthy financial system. Private banks will bring innovation in product, technology, customer servicing and a market-based discipline to lending. Private banks knowing that they cannot count on government's protection are less likely to indulge in risky lending. They would make banking more responsive to the needs of modern economy. Employment also tends to increase post privatisation. HDFC Bank is the only bank that ranks in the top 50 companies in Asia. Many private banks are opening their new branches in unbanked areas and expanding their reach in rural areas. The decision to merge and consolidate banks in India is against the post 2008 crisis that big banks are a systematic risk to an economy. When two entities serving same set of people merge, they naturally tend to loose incentive to compete with each other. It become difficult to discipline them in case of predatory behavior.
It is true that privatization has some risks too, but its benefits outweigh its cost and is the only way to revive and restore the financial health of our economy.
Against The Motion(Megha)
There has been a clamour by various organizations to fix good the problem of NPA’s and financial frauds in the Indian banking system by privatizing them.
To begin with, NPA’s is not exclusively a problem of the PSB’s. In the last few quarters, private banks have reported rising slippages from legacy loans. Mergers will help the banks deal with the NPA problem more efficiently in return for government assistance and make the recovery far more focused. Banking failures have deep consequences for the economy because of their network externalities. There are examples all over the world where private banks had to be bailed out by the Government after a financial crisis in their economies. How can Nationalizing losses and privatizing profits be considered as a reform? The Malaysian financial system was highly fragmented and had excessive bad loans after the East Asian Financial Crisis 1997. The mega bank mergers of PSB’s pulled the economy out of the crisis mode and acted as a source of influencing competitive advantage. Similar successful experiments were conducted in Singapore and Korea.
The recent SBI merger will create banking giant with a balance sheet of more than 37 trillion rupees which will enable them to obtain funds at cheaper costs, lower their lending rates and increase their profitability. This merger will also help India feature in top 50 largest banks of the world. Merger of banks can help to sustain the growth in the Indian economy by investing in large infrastructure projects and creating Brand India among international investors.
The need of the hour is to strengthen the state owned banks by various measures such as staff development, digitalization, specialized monitoring of loans, tighter accounting on NPA recognition, early warning system on imminent default etc.
4. An equitable financial inclusion can be achieved through privatization
For the Motion ( Anusha)
Financial exclusion is when there is a lack of access to financial services – on grounds of socio-economic, regional, political reasons. The aim of financial institutions is to prevent involuntary exclusions.
However, we note that
1) Supply-side efforts through proliferation of bank accounts do not imply their subsequent usage for savings and transaction purposes. Banking correspondents are link used by public sector and regional rural banks to increase coverage in otherwise excluded areas. Recent NSSO reports reveal the continued reliance on non-institutional credit sources. Small scale reports also discuss the high transaction costs involved in terms of traveling and using banking services in rural areas, considering that the major reason for setting a bank account is to safeguard money as opposed to saving and earning interest. We cannot be sure that the public sector led regional rural banks and the likes have managed to include those who would have otherwise been excluded.
2) Private Banks are also able to cater to demand in otherwise excluded areas. RBI has mandated priority sector lending - this has increased the presence of prominent private sector banks in rural and suburban areas. Moreover, there is also a demand-side pulls - the government in the budget has allocated heavily for agricultural and rural development. The increases in rural consumption are an additional incentive for growth of finance in these areas through realization of the untapped growth potential.
3) Perhaps Micro-Finance institutions and niche banking services have a greater role to play in the prevailing situation of growing reliance on non-institutional credit in rural. The success of micro-finance institutions in other countries (for example, Indonesia), also provide a model for financial inclusion that can help transform the sector - through encouraging demand based systems.
Against The Motion (Sumanjay)
Financial Inclusion and Privatization of Indian Banks:
So, my opponents support privatization on three grounds:
1) Competition leads to an effort to reach out to less banked or unbanked areas.
2) Deep pockets of the corporate magnates will help them to reach out with greater vigor.
3) Financial Inclusion requirements as imposed by the government will work in that direction.
However past experience and market logic seem to suggest otherwise. Corporate banking in India is not a recent phenomenon or prospect. It has its roots dating back to the 19th century. Moreover, the Second World War led to creation of many more such banks which helped in boosting wartime production. However, after independence, most of them failed or were amalgamated. Dutt Committee (1960) found that the top 20 private banks accounted for 61.7% of all scheduled bank deposits and 73.2% of scheduled bank advances. Around 10% of the aggregate advances made by these banks went to companies in which their directors had an interest. Share of agriculture fell from 2.1% to 0.4%.
Furthermore, liberalization has also led to a situation where the number of rural branches (in % terms) fell from 58% to 37%. The population per branch rose from 13700 in 1991 to 15200 in 2001 and close to 16000 by the end of the first decade of this century. Also, there was decline in priority sectors lendings following the economic reforms of 1991. Also, lending at more favourable terms to the unbanked and the poor would push up the costs and further lead to an increase in interest rates, thus driving a private bank out of the market. Hence, both historical and market and logic do not support the claims of my opponents.
5. Amid rising scams, Govt. institutions have lost its credibility.
FOR THE MOTION(Akshat)
Govt. Institution, in general, has lost all its credibility. The Independent Institutions, whose decisions and judgments ,till the recent past, were looked with utmost respect ,is now under clout.
Lets first look at Reserve Bank of India (RBI)
Post demonetization, questions have been raised on the independence of the Institution.RBI was caught unprepared in the entire Notebandi exercise and thus depositor’s trust on the Institution took a huge hit. It was Govt. which took the decision, it was Govt. which executed the decision, it as Govt. which kept listing out benefits of demonetization post Nov. 08 .What did RBI do? It just sat there and allowed Govt. to take advantage of its reputation and let it be tarnished.
Bank Frauds – The biggest scam in the banking sector (PNB Fraud) has also raised doubts about the Regulators efficiency and control over the sector .This is not the only scam to hit the public sector banks. In the last 5 years, of the Total Fraud – about 83% of the amount of such fraud happened in Public Sector Banks.
The main problem that can be highlighted here is the interference of the Govt. in the working of such Institutions. Even though these institutions have their own Constitutions and follow regulations, Govt. dictates terms with them. The autonomy lies only on the paper .They can never act independently and thus credibility of the decisions of the institutions has been lost.
Thus Govt. needs to take a decision now on how it wants our Respectable Institutions to work. If it doesn’t allow them to function independently, we might eventually be saying
“Ye Gormint Institution bhi bikwww gayi hai”
Against the Motion(Sonal)
Before we challenge the credibility of the government on the basis of the recent scams, we must first realize that history is replete with cases of bank failure, frauds and NPAs in the private sector banks as well.
1. Private Bank Failure:
· In 2008, a whole lot of American and European private banks, which included some of the most reputed names in the world, had to be bailed out by the government.
· Even before 2008, it was the private banks of Japan in 1980s and Korea in 1990s, which required to be bailed out with vast sums of taxpayer money.
· Here, in India, even before the nationalisation of banks in 1969, as many as 736 private banks either failed, amalgamated, or went into liquidation between 1948-1968. In fact, even despite strict measures of the RBI post 1969, 36 private banks have either shut down or gone into a merger in the past 49 years.
2. NPAs:
· As per the Financial Stability report of the RBI published in December 2017: The rate of increase of NPAs, while 17% on a year-on-year basis for the PSBs, is actually 40.8% for private banks in the same year.
· The same report also notes that some of the top-most private sector lenders – Axis Bank, ICICI Bank, YES Bank, HDFC Bank – are all found to have under-reported their faulty assets in the RBI supervision.
3. Bank Frauds:
Nearly 13000 bank frauds have been detected between the years 2014 and 2017, 8622 of which were detected in PSBs and 4156 bank frauds in private banks. Given that PSBs have a nearly 70% market share, we can clearly see that cases of bank frauds in private banks are more than that in PSBs.
4. Coming to matters of credibility of the PSBs, a working paper by the IMF on Systemic Banking Crisis, highlights that Indian PSBs have required very little bail outs as compared to the rest of the world. Despite the persistent issue of NPAs in our PSBs for 5 years now, we have not had a run on any bank and it has had limited impact on our growth. Thus the faith of the common man (or woman) in India continues to lie with the PSBs, simply because PSBs, are backed by a sovereign guarantee and we have never had a single bank run in the public sector in all these years.
Lastly, I would like to ask the House and my worthy opponent, what do you think would have happened if in place of PNB, it were a private bank struggling with an 11,500 crore rupees scam? In case of private bank failure, the taxpayers are always left to bear the brunt. It is the government and the RBI that never allows for such a case to happen and steps in to protect the interests of the depositors.
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