The blogger got into a very interesting discussion with friends who are financial market professionals and very savvy ones at that.
One question that cropped up was how is it that losses in banking are limited mostly to the public sector banks and not the private sector ones? If we have the same set of corporates, why is it that corporates choose to default with public banks and not private ones? Before viewers think this was some left oriented socialistic leaning group, it was just the opposite. The views of the discussants had emerged after seeing the way banking has been working in India and globally.
This question is going to be dismissed by most as a worthless discussion. Public sector banks make losses as they are owned by govt, have governance issues etc. Obviously, this answer chooses to ignore the kinds of malfeasance we are seeing in global private banks. But this issue of public vs private banks cannot be easily dismissed now with huge losses showing in a foreign bank which actually believes itself as an Indian player.
So what exactly is going on?
In the discussion, one was enlightened on how banking actually works between public and private banks:
- Most big companies which need big loans first approach public sector banks given latter’s large scale.
- Those who approach the private sector first usually require smaller loans and are not really so called great companies. So we have an issue of borrower quality with private sector banks which is puzzling.
- Contrary to what most imagine, the loan practices of public sector banks are far more stringent and cautious. This is because of fear being caught in some state audit and so on. So you approach a public sector bank, it will sit on the loan for some days/months verifying things before sanctioning the loan. What is termed as a slow and inefficient banking is actually a case of prudent banking.
- Whereas in private sector, loans are approved as quickly (sorry efficiently) as possible. Very little paper work and formalities are needed. The whole idea is to sell off the loan and look for the next one. This practice has made the private sector more popular with the corporates. However, given they remain smaller than public banks, corporate sector’s choices are limited.
- Even more interesting was this supposed fact that when public sector banks reject a big loan on the basis of dubious quality, the corporates have little choice but to approach private sector. So, instead of one public sector bank, they might approach 2-3 private sector banks for arranging the loans.
- Another issue which was raised is with respect to loan sizes being handled by people in the two banks. In public sector banks, it takes years of experience before one starts handling the amount which one handles within few years in private banks. This whole issue of private banks doing better because of young employees is overstretched and overhyped. Banking is all about experience and seeing through multiple business cycles. The more you are experienced, the more cautious and prudent you will be while giving loans. Banking is all about history …
- Then there is this huge problem of how politicos interfere with bank loan policies and swindle money to their cronies. One was told this is how things are even at private sector banks as well with loans going to those who know the top management. One major objective of bank nationalization was to dismantle this relationship between banks and top companies.
Given all these advantages with public sector banks, why is it that NPAs and losses only accrue in them? The answer given was more interesting. It is because the public sector banks are more transparent with their operations! PSBs are disclosing all these NPAs whereas private sector is just postponing the losses. Latter keeps giving you more loans to pay off previous loans and the game goes on. It is a ponzi scheme which is actually attributed to PSBs. Why hasn’t this bust so far? It is a matter of time..
So much so, there were thoughts on why all banks should have be partly nationalised given how much public money is involved. 🙂 There is nothing wrong with public sector banks as perceived by the media and other experts. Of course, we have plenty of examples from global private banking justifying the same.
Given economics hug bias for all things private, the blogger was still hopeful that private banks are likely to do their job better (would have said much better before the discussion). Though, on is still struggling to figure this question – How is it that given the same set of companies, the poor loan choices are made only by public sector banks and not private sector banks? Who is choosing whom? Do private sector banks always make the wise der
Lots of contrarian ideas and thoughts were discussed, some really interesting and worth thinking about.