Post-Pandemic Banking: A way toward Bank Nationalization?

By 14/07/2021May 2nd, 2022No Comments
bank nationalization

Bank Nationalization

As the pandemic continues to ravage lives and livelihoods, one unintended victim shall be the Indian banking industry. In the newfangled language of the virus, those with co-morbidities will suffer. This includes financial institutions – banking and non-banking.

In the economic sense, public sector banks (PSBs) which entered the pandemic quite fragile are likely to be severely hit. The reason is, that the knock-on effects from worst-hit sectors during the pandemic will flow directly to banks and NBFCs further exacerbating the non-performing assets (NPAs) problem. Therefore, during such testing times, the Indian government has provided relief to stimulate the sluggish economy and prevent economic disasters.

In the past year, the Reserve Bank of India (RBI) had allowed moratoriums, which will pile up and create a negative impact over the course of this year and the next. Fortunately, RBI permitted a one-time restructuring of loans to companies in the distressed sectors to iron out this problem.

Furthermore, RBI can loosen its prudential norms to a pre-1992 era and not recognize bad loans – a move that is likely to allow banks to operate at a slower pace of credit in the economy, given government ownership prevents runs on banks. Alternatively, recapitalization of the banks by an extremely cash-strapped government can be considered by RBI. However, both options are tough and the gravity of the crisis cannot be washed away.

One result of a distressed economy and failing monetary reliefs indicates that the government may be required to play a significant role in the fate of many banks. When the government does intercede, the topic of nationalizing banks often arises soon after, and the subject stirs lively debates.

After having observed just over 50 years of the majority of the Indian Banks having been nationalized, a debate between the erstwhile stance and a recent privatization-led regime has arisen.

Whilst bank nationalization stood for energizing priority sectors, the crumbling and debilitated functionaries and MSMEs that were, and to a great extent, still are, in desperate need of well-regulated credit, the recent view on privatization of these banks has opted for a rather capitalism driven approach.

The emergence of the school of thought that re-privatization of PSBs finds its roots in the ideologies that are rooted in advocacy for freely flowing competition in the marketplace, where individuals fend for their own selves, where they adapt, survive and overcome, or succumb to marketplace fiends and secede to stronger competition.

To such a school of thought, governmental aid comes a as bail-out option, aimed at keeping the proverbial ‘ailing and wounded animal’ alive rather than putting it out of its misery.

However, amidst all the hue and cry between the two, the intent behind the Indira Gandhi government of 1964 should once again be taken into consideration, which so feebly hangs between the two. The concept of wiping out NPAs and Bad Assets from the economy not only warrants efficient working of recovery mechanism under the SARFAESI, I&B Code, and the RDDBFI but also deems the establishment of institutions such as Bad Banks as necessary.

In essence, the revitalization of the nationalization led movement would require the functioning of Bad Banks, wherein procurement of NPAs stressed assets and bad loans would further the intent behind the revitalization of the erstwhile intent, while also maintaining a quasi-capitalistic mechanism of banking institutions being run, that emulate the recent privatization led ideologies.

Furthermore, since the procurement of banks of illiquid assets with credit risks is done, the banks earn hefty incentives from the government in the form of credit-provisioning subsidies and liquidity-increasing tools. Thus a healthy synergy between the banks, the public they’re targeting and the government, to encourage such banks, may be seen as vital for a reinvigorated credit facilitation system and the Indian economy at large.


Tags: nationalization of commercial banks, all nationalised bank, nationalisation of commercial banks, non nationalised bank, bank nationalization, nationalized banks, nationalisation of rbi

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