Bank nationalization in India happened 51 years back, part of the measures undertaken by then Prime Minister Indira Gandhi to bring in a socialist economy. How has been the five decades-plus long journey of the nationalized banks? The central government in the sixties had felt a strong need to adopt policies to influence the rate of growth in poorer states and regions to reduce their economic distance from the richer ones. A major instrument in bringing about this regional disparity, it was envisioned, was the transfer of financial resources to the poorer states. Bank nationalization was key to this strategy.

Following nationalization of 14 banks in 1969 (and subsequently six banks in 1980), the expansion of the network of their branches was used to favor backward areas. Banks were directed to promote investment in these areas through mandated lending and participate pro-actively in various government schemes.

From the Integrated Rural Development Program to Lead Bank Scheme to Twenty Point Program of the yesteryear to the present Jan-Dhan Yojna scheme and financing Micro, Small and Medium Enterprises (MSMEs), the contribution of nationalized banks/Public Sector Banks in banking penetration in remote areas, financial inclusion and socio-economic development has been laudable.

Problems and challenges also mounted on many fronts. PSBs got embroiled in and earned flak for faulty appraisals, ever-greening, corruption, misconduct, misgovernance, frauds, political nexus, crony capitalism, etc., which together led to a steady rise of Non-Performing Assets (NPA) and denting of trust and image. Loan melas, policy paralysis and loan waivers added to the woes in varying severity. Further, the Bank Nationalization Acts and the schemes, by being anachronistic and more concerned with process issues in the context of boards remained silent on liabilities and consequences for bad judgment and the decision-making of boards.

In the role of owner, the government over the years assumed a wider set of responsibilities in the running of the banks. The management of the bank was shared between the government and the bank's board. In this eco-system, bank boards could not be empowered and had to be content with limited autonomy over key decisions in steering the bank's strategy. Further, a sweeping centrally coordinated standardization (such as in recruitment, compensation, technology, and vigilance) for PSBs was pursued in the name of lowering costs and providing coordination.

However, this approach, by seeing the banks as mere utilities and not commercial businesses continued to be inimical to attaining differentiation and competitive advantage, which are essential attributes of corporatization? By imposing a plethora of standardized requirements upon these banks, the governments not only contributed to their homogenization, but also deprived them of achieving economies of scale, and competitive advantage. Private sector banks, in contrast, have been free to innovate on all aspects of their businesses, subject to regulatory constraints.  They have also made full use of the troubles and sicknesses of the PSBs and captured a larger portion of the banking system.

Re-capitalization

To provide succor to the banks struggling to deal with burgeoning NPAs and facing a shortage of capital, the government from time-to-time kept on announcing re-capitalization to maintain the threshold level of capital reserves and keep them afloat. For records, the government has infused over Rs 3.15 lac crore in PSBs in the 11 years through 2018-19 as per the information placed before parliament. Further, in the budget for 2019-20, the government has outlined Rs. 70,000 crore recapitalization plan to boost credit for a strong impetus to the Indian economy.

Recapitalization, whenever undertaken, did raise issues of moral dilemma apart from questions on poor management oversight, non-transparent disclosures, and low standards of corporate governance in the banks. No doubt, the infusion of capital helps the beneficiary banks absorb the losses and finance credit growth, but the question was, after re-capitalization what? Without robust performance, the excellence of human resources, credit appraisal, monitoring system, and accountability framework, would such frequent augmentation of the capital base through precious public money could be termed reasonable and feasible?
                                                                         
With the ongoing pandemic crisis, crippled businesses and low recoveries, it is feared, the stress on assets is likely to mount further and so the responsibility of the government to bolster banks' capital reserves to meet Basel norms and maintain their lending capacity, will further be high.

Consolidation and rationalization.

Sure, prioritized lending and directed engagement in government schemes apart, the PSBs did implement – albeit in bits and pieces, and with a considerable lag - recommendations of various committees to improve their health and functioning. The two Narasimham Committees and PJ Nayak Committee were some important ones set up during the last five decades which dealt with issues of structure, robustness of the financial system, autonomy, governance, and control of PSBs. The ongoing consolidation/mergers, for instance, are in the direction of the recommendations of the first report of the Narasimham Committee in 1991 where the requirement for fewer but stronger banks for the Indian economy had been highlighted.

Thus, along with recapitalization, lately the government with an objective to build strength and competitiveness, rolled out plans of amalgamation of PSBs in order to create stronger banks with a global presence. As on date, out of 20 nationalized banks (14 in 1969, and 6 in 1980), the number, upon a merger, stands to shrink to 11. This consolidation is currently seeing the rationalization of branches at a massive scale in the merged banks.
                                                                             
Sure, the consolidation of the banks may bring intended synergies of workforce and capital or streamline operations, but whether this will necessarily raise efficiency or entail diffusion of best practices is a moot point. Repositioning and branding due to size, without radical reforms in ownership and governance, is unlikely to foster a growth mindset and a competitive working culture.

Corporatization - the missing piece!

Importantly, in the long checkered journey of nationalization one thing, however, has been strikingly missing. That is corporatization.

The stout clinging to the high shareholding pattern and a weaker political will to corporatize PSBs by governments is understandable. The stronghold/control of the banks served the purpose well for using the banks for directed lending and as vehicles to uplift socio-economic conditions of the disadvantaged and marginalized. On the other hand, unfortunately, it also perpetuated a culture of status quo and mediocrity of PSB’s Management and Boards. In this culture, serious issues of shortfalls in efficiency, productivity, and governance standards did not find adequate attention as engagement in and compliances with government-oriented schemes/dictates were considered more immediate and important.

Ushering in corporatization was in fact the soul of the PJ Nayak Committee Report submitted in 2014. The piecemeal changes implemented like splitting the post of CMD or formation of Banks Board Bureau (recommended by the Committee) is peripheral ones, leaving the core still un-institutionalized. As we know, the Committee had made a strong case for reducing government shareholding to less than fifty percent and setting up a Bank Investment Company (BIC) to hold equity stakes in the banks. BIC, it recommended, should be incorporated under the Companies Act necessitating repeal of statutes under which the PSBs are constituted, and transfer of powers from the government to BIC. “Full autonomy, empowerment, and relevant professionalization of the BIC board is a prerequisite to the reform and strengthening of India's public sector banks.” the report asserted.

Corporatization of nationalized banks is a crying need to meet emerging challenges. The emergence of new banking models, in the form of payments banks and small finance banks, have widened the horizons of banking in India. Similarly, Fin-Tech is offering alternative models of lending and capital raising. The low-cost nature of these businesses and the use of big data to assess the riskiness of borrowers and thereby reducing the need for collateral is catching up and will soon be scaled up to pose a significant threat to conventional banking.

Further, artificial intelligence, machine learning, and big data are becoming central to financial services innovation. Ranging from analysis of vast data for customer expectation trends, decision making, market intelligence, risk management, regulatory compliance reporting, e-KYC / anti-money laundering and fraud prevention, these technologies are already finding extensive use in big private/foreign banks. Indeed, digitization, modernization, and innovation are now some testing grounds for the government-owned banks to survive and thrive.

Furthermore, in the new age and particularly in the post-pandemic scenario, the banks would need to have an eco-system with totally different work culture. Employees will need to have attributes like empathy, relearning collaboration, managing hybrid schedules and working independently with lesser or without supervision. This would require a new learning climate, with CEOs of the banks taking lead as learning ambassadors. Corporatization, with its focus on outcomes coupled with the accountability framework will enable independent and quick takes by the boards on modalities of reworking on a whole matrix of talented employee recruitment and incentives to compete successfully in the market place.

Nationalized banks thus need to strive to make the most of the dynamic changes in the environment not only to stay relevant in the minds of a transient customer pool, but also to create differentiation and competitiveness. And for all this to happen, structural changes in the ownership and governance befitting a strong corporate structure and culture is direly needed.

The 51st year of nationalization will be truly auspicious if we witness concrete steps towards boosting the immunity of the nationalized banks through radical doses of reforms.

(The writer is a former bank executive who has authored the book X Factor @Workplace. The views expressed are personal. He can be contacted at rkrishnasinha@hotmail.com)