Economic Survey 2020: Public Sector Banks Lost 23 Paise For Every Rupee Invested In 2019

Fifty years after bank nationalisation, government-owned banks continue to play an important role in the economy but are riddled with inefficiencies, argued the government’s Economic Survey 2020 presented a day before the budget.

The survey stayed away from recommending privatisation or lower government shareholding in these banks and, instead, suggested the use of fintech and stock-option based incentives to improve the functioning of these lenders.

According to the survey, over Rs 4,30,000 crore of taxpayer money is invested as government’s equity in public sector banks.

The survey went on to benchmark the returns for taxpayers, whose money has been invested in PSBs, with the returns earned by investors in new private sector banks.

The analysis showed that the foregone return on the taxpayers’ investment stood at over Rs 1.4 lakh crore. This, according to the survey, ranks as one of the largest subsidies and compares to the country’s food subsidy bill.

Another way to understand the scale of inefficiencies at PSBs is to look at the value taxpayers derive from their investment in these lenders. To judge this, the survey looks at the stock market-to-book value, commonly referred to as price-to-book value.

The survey also indicated that foregone return on taxpayer money invested in public sector banks was higher than the funds India spends on rural development or health, education and social protection.

Suggestions To Improve PSBs

While flagging a host of inefficiencies at PSBs, the survey stayed away from making any dramatic suggestions for change. It neither recommends privatisation nor a sharp reduction in the government’s holding in these lenders.

It does suggest that India needs banks of greater scale, which has been pursued by the government through mergers announced last year.

The survey also leans on suggestions made by previous committees including the Narasimhan Committee (1991, 1997), Rajan Committee (2007) and PJ Nayak Committee (2014). The Nayak Committee, the most recent of the three, had suggested a bank holding company to distance the government from the functioning of PSU banks.

The Economic Survey 2019-20 instead focuses on the use of fintech and employee stock ownership at PSU banks.

The survey argues that these recommendations need to be “seriously considered and a definite, timebound plan of action drawn up”.