Whether it is the Harshad Mehta scam of 1992 or the Ketan Parekh scam of 2001 where money from a co-operative bank found its way into the equity market, it is usually a scam that prompts policymakers and regulators to review banking processes and, thereafter, bring in a fresh set of rules and regulations to prevent another scam. The PNB scam has, expectedly, provided the ground for another such review. However, past record shows that such an exercise does not result in creating a foolproof system that will prevent scams. First, there will be a blame game, and then a committee will present a report. Along with it would come tinkering with some regulations to bring in further checks. As this happens, some persons are likely to spend some time behind bars. However, as is often the case, a new scam would be perpetrated using an altogether new modus operandi to take advantage of the loopholes. In this process, the biggest losers are the taxpayers whose money is regularly pumped into the banking system to revive it. The point to note is this: It is only because the government is the largest shareholder that taxpayers’ money is ploughed into the banking system when it falters.

These developments once again raise the question, why does the government need to be in the business of banking? Yes, there was a time when the economy required banks that had access to large funds. Besides, banking needed to be taken to the rural areas. Only, the government could have taken up these tasks at the time. The stage when handholding was required is now over. In the last two decades, private banks have been able to efficiently meet the requirements of some of the segments of the economy —whether consumer loans or housing finance, they have performed creditably without creating the mess of non-performing assets.

The argument that PSU banks are required for social banking does not hold water. The guidelines of priority sector lending are the same for public and private sector banks. Yes, it is a fact that private sector banks use their own ways to meet priority sector lending targets. But the fact remains that even after taking into account buying of loans and bonds of institutions which qualify as priority sector lending, the performance of private sector banks in the priority sector is better than public sector banks. While it is doubtful that given the political costs in terms of taking on labour unions, any government would attempt to get itself out of the PSU space. But, assuming that a government gathers the conviction to do so, then comes the next question: Will there be a buyer for its stake in these banks with such weak balance sheets? Given the developments in the financial technology space, probability is high that any government would find it hard to sell its stake at a reasonable valuation.

The solution lies in following the Axis Bank model — have a stake in the bank, but through institutions and let the bank find its own means and ways to grow. The government should look to merge a couple of banks, both weak and strong, so that the balance sheet size becomes reasonably large. The government should bring down its stake below 51 per cent and let the board run the bank professionally. As the bank becomes more efficient, the government can keep reducing its stake in it and recover all the money which it has put in it over time. Today, 28.04 per cent of the stake which the government holds indirectly in UTI banks through insurance companies and SUUTI, is valued at Rs 38,798 crore, and a part of this which is held in SUUTI would be monetised sooner or later. Compare this to a situation where, in the last eleven years, the government is reported to have pumped in Rs 2.60 lakh crore of taxpayers’ money in PSU banks as capital. The fact is that if the government decided to reduce its presence in the banking space, it would have huge resources to focus on areas that should be its priority, like healthcare and education.