 Hello and welcome to New Slick. I'm Poranjoy Gohatakurtha with me here in the studio. I have Hemindra Hazari a very very perceptive analyst of India's banking sector. In the seven conversations that I've had with him so far, we've dealt with specific banks, be it the ICICI Bank, Yes Bank, Kotak Mahindra Bank, AXIS Bank. We've also dealt with other entities like the Infrastructure Leasing and Financial Services Group with the India's premium mortgage financier HDFC Housing Development and Finance Corporation. This episode is focused more on the political economy of India's banking sector. Mr. Hazari, after the Punjab National Bank scandal of January 2018, there was a hue and cry that privatization is the way forward, whether it be the then chief economic advisor to the government of India in the Ministry of Finance, Dr. Arvind Subramaniam, corporate captains like Mr. Adi Godrej, who heads the Godrej Group. They form a chairman of the public sector Bank of Baroda, Mr. Ravi Venkatesan, who has a background in the private sector, journalists like Shekhar Gupta. All of them argued that many of the problems of Indian banking could be sorted out if public sector banks were not just consolidated by privatized. That the original sin was committed by Mrs. Indira Gandhi in 1969 when she nationalized much of India's banking sector, which bred crony capitalism, crony socialism, managerial incompetence, moral hazards, and at the end of the day a drain on the country's exchequer. Why do you not agree with this perception or this view? See, I fundamentally disagree with the view is because a lot of it is a political agenda and the political agenda is to privatize as much as possible of the public sector. And the only focus on the many, on some of the negatives, and there are negatives in the public sector banking, there is no denial of that. However, they either they are completely ignorant or they are deliberately ignoring how the economic and banking environment was prior to 1969. How these private sector banks prior to 1969 were conducting themselves and they had, they were ignoring agriculture. They were all metropolitan based. You know, a lot of the key functions that they were doing was actually they were functioning for the only the top sections of society and therefore from an economic model and from an economic policy point of view, there was a need for redistribution of the national income of India. Mr. Hazari, how can you argue that this may not have happened under if banks were privately owned? I mean, they could have spread out to rural areas, given extended credit to small and medium enterprises and cottage industries and under the private sector, there would be greater accountability to shareholders. Therefore, the room for corruption, the room for interference by politicians would be lower. That is the other argument. The argument was that this was not happening. They were trying that argument before 1969, but it was not coming to the conclusion that they wanted to and therefore they thought that it was the nationalizing the banking sector and using funds from the National Exchequer to promote rural development, to focus on small and medium enterprises which were being denied credit. Now, you know, to see actually how it's happened is even after you see the new private sector bank which was set up post 1991, now they have been in existence for about 20 years and what do you find? You find if you look at their focus and their composition of their deposits and credit, it is all metropolitan. It's very, you know, much much less even after 20 years of existence, their concentration of their deposits and credit is significantly higher in metropolitan India than public sector banks, which tells you that they're only focusing and naturally so on the wealthier segments. Mr. Hazari, the public sector banks had what was called the preferred and priority sector. They were mandated to give a certain proportion of their loans to those in the rural areas, for agriculture, for small and medium enterprises, for cottage industries. Now, can you not have a similar mandate for private sector banks and if this is not happening, who would you hold responsible? Would you hold the regulator, the Reserve Bank of India, responsible or the political leadership of the country? You know, very clearly it is the regulator and the political leadership of this country because that is why banks are licensed. It's not anybody can cannot open a bank. You have to be licensed and therefore, there has to be a national objective, especially in a country like India where vast chunks of our population, they survive on sustenance or the, you know, their income levels are very poor. So therefore, your banking system, which is a very key component of your economy, has to go to address those concerns. It is not just for market cap and for rewarding shareholders. Tell me, Mr. Hazari, if you look at what's happening across the world, it's been more than a decade since there was this, the Great Recession, when in September of 2008, Wall Street collapsed, Lehman Brothers went down. We've also had a lot of scrutiny Anima Papers, Paradise Papers, other investigations looking at the activities of Doge Bank, HSBC formerly Hong Kong and Shanghai Banking Corporation. So many issues were rigging off, whether it be the London Interbank offer rate, the manner in which they were allegedly complicit in money laundering activities. But we find that the regulatory authorities at some point of time did take stern action. Can the same not happen in India? So if the Reserve Bank keeps these banks on their toes and does its task of regulation in an efficient manner, then many of these problems wouldn't have come about, including the problem of ballooning non-performing assets, loans which have not been repaid. See firstly, there has to be very stringent and penal action should be taken by the regulator very swiftly whenever there is major non-compliance. Unfortunately, until recently in my opinion, the Reserve Bank of India has not been stringent enough. You know, only now we are seeing it when the terms of various private bank CEOs like Shikha Sharma, Rana Kapoor have not been approved by the regulator. Not to mention the investigations currently going on against Mrs. Chandakochar. Well, RBI had no role to play really. So what you are finding in my view, and even in the case of Rana Kapoor and Shikha Sharma, they waited for the term to get over and then they did not renew the fresh term. In my opinion, they should have been removed immediately once they detected some concerns. Now in the case of what you see of non-performing loans, I think you have to appreciate that we are looking at an entirely changed political regime environment globally where you want to privatize your infrastructure. And therefore, but the financing of private sector infrastructure is done by government banks because it is risky and private sector banks don't do that. But when they run into problems, we blame the PSU banks for financing such high risk projects. These such projects like infrastructure should not be financed by private, should not be undertaken by private sector. These are areas where the state should be doing it themselves. But you have said instead of privatizing, the government could buy out the non-government stakes and some of these banks in, as you point out, the government itself, bodies like the Life Insurance Corporation are holding major dominant stakes in many of the public sector banks. But the question is, why in India should we go against a global trend? If the answer is not the ownership of the banks, but the way in which regulations are implemented, then the issue is not an ideological one, but one of management. Firstly, as I said, last chunks of your population, they survive on very low incomes. So, you need to address their concerns and banking is one of the means of where you address those concerns. They have to be provided credit, for example. Now, if you believe that private sector is going to do this, they are not going to do this because private sector very rightly, their sole objective is profit maximization. But can the government not mandate it? No, they have mandated it. Let me tell you, the priority sector targets the same for government banks as well as private sector banks. So what's the problem? The problem is that over the years, you have diluted the actual standards of priority by including a lot of other economic activity which actually does not address the target population that you want to address. So you have to go back to the State Bank of India and the Punjab National Bank and the Bank of Baroda to cater to those who live in rural areas and small boroughs. And it is not a profitable strategy. That is why you require government ownership because these in such business strategies are not profitable. Therefore, the private sector will either ignore such segments or they will exploit those segments and that is not the way you want your economy to develop. My last question to you Mr. Hazari is that what does this entire episode in the ICICI Bank tell you? It's not merely that whether you talk about scams or conflicts of interest or nepotism or corruption is a prerogative of either a public sector bank or a private sector bank. It can happen. So when you look at what happened and the manner in which the whole story emerged about the manner in which Mrs. Chandacocha, her role in the way in which her husband and her other husbands associates, companies gained eventually despite the investigations by the enforcement director. They've been grilling her. They've been grilling all kinds of people for hours and hours and ends. Nothing may eventually come out in terms of criminality. That is true. But I think what it shows though is that the first line of defense is the Board of Directors. And what we have seen in both ICICI Bank or Yes Bank or Axis Bank is that the Board fails to discipline, to do any kind of appraisal of its CEOs or take action against them. Now when a CEO is there are allegations which definitely need to be investigated, prudent Board would have asked the CEO to step down, do an independent investigation. But if you look at the case of ICICI Bank, there's only public pressure and media pressure which finally led the Board to act, till then the Board was refusing to act. And this is what I've seen and documented in Axis Bank, in Yes Bank. So this whole idea that the Board, corporate governance norms will discipline the executive management, will keep promoters in check. Is it very rarely seems to happen? And that is the crux of the issue because the independent directors are very rarely independent. You know in your article in the wire written on the 25th, published on the 25th of February 2018, you've actually argued for re-nationalizing the government banks. Many people would argue that you are approaching this entire issue of the problems of Indian banking from a blinkered ideological perspective, which is unreal, impractical, perhaps utopian, because that won't happen. The reverse is likely to happen. Most definitely the way we are seeing global developments also, that's what we've been seeing since the early 1990s, that there is this belief that the free markets, the way they operate will achieve these goals of national or even broad-based economic development. But at the same time globally as well as in India, there is a lot of data to show that there's widening inequalities and that the market forces are actually aggravating those. They're not trying to converge them. So you're getting policies which are specifically designed to benefit the top sections of society. And again I would add in a country like India, whether you know vast, probably the majority of the population lives on very low incomes. If you ignore them, then you're going to see serious social economic problems. Thank you so much Mr. Hazari for giving us your time, for speaking with us, for speaking with NewsClick. And thank you very much for being with us. We conclude over here the eighth conversation in a series of conversations with Hemindra Hazari, independent analyst of India's banking sector. And if you haven't watched our earlier conversations on the ICICI bank, on ILNFS, on Kotak Mahindra, on UTI bank, sorry, Axis Bank, on Yes Bank, please don't forget to watch these conversations because this kind of conversation, this kind of analysis, you're not going to get anywhere else, certainly not in much of the mainstream media. These are very, very perceptive discussions. Thank you for being with us.