Big Fish Bonanza, Small Fry Blues

In the age of banking frauds, how easy is it for the common man or the small businessman to get a bank loan? While big businesses and corporates have it easy with banks, particularly public sector banks (PSBs), the small borrower is often made to run from pillar to post for a loan. Across the country, stories abound about how small businessmen and common people are harassed by PSBs by being made to go through a complex maze of procedures and regulations even as things are offered on a platter to big businesses.

Experts say that while in the past banks would give loans to big businesses against industrial or residential property as security, now the guarantees are much easier to obtain. The letter of undert­aking (LoU)—which is a bank guarantee that is issued by the bank for overseas import payments—is also easier to get. A bank, while issuing an LoU for a company, agrees to unconditionally repay the principal and interest on the company’s loan. The ease with which LoUs are ­obtained by companies today is evident from the Nirav Modi case where LoUs were issued indiscriminately by Modi’s  bank towards his businesses on which he has so far defaulted.

But things are not so simple for common people and small business owners who tap on a bank’s door for a loan. “For newcomers, banks will give loans only after getting 100-150 per cent security on the loans,” says Rajesh Ailawadi, former SBI official and a banking sector consultant. “Loans are given without security only for A+ rated companies that are more than 5-10 years old. Since the last three years, even PSBs are insisting on a 120-150 per cent security from borrowers.” In some cases, banks even look at whether a small business owner’s EBITDA (Earnings before interest, taxes, depreciation, and amortisation) is within an estimated range. If so, only then is one even considered for a loan.

For consumer loans, applicants are asked many questions by PSBs and in most cases, they have to get a guarantee from a government official; a difficult task for most people as no one is willing to guarantee a loan. Take the case of Devi Prasad, a newspaper vendor. He required Rs 15 lakh for his children’s higher education overseas. He tried his best to get student loans from at least three PSBs but failed as he could not get a government employee to stand as a guarantor. Finally, Devi Prasad had no option but to borrow the amount from a money lender at a higher interest rate than what the banks would have charged. He does not understand why people like him, who are unlikely to default on a ­repayment, are denied loans. “For consumers, a loan of up to five times their salary is given, but this is only if they are working in the ­organised sector,” says Ailawadi. “If not, then the chances of their getting loans are less than 40 per cent.”

This is why most small businesses and consumers are often pushed to taking loans from other sources, inc­luding money lenders. Non Banking Financial Companies (NBFCs), for ­instance, give loans more easily than PSBs. But NBFCs also have their own monitoring mechanisms and recovery techniques that are far stricter than a bank’s. In many cases, borrowers also have to furnish margin money in order to get a loan. “Normally, banks ask for at least 25 per cent of the loan amount to come from the borrower’s own funds to be eligible for a loan,” says Vishwas Utagi, former vice president of the All India Bank Employees Association. “Then they have to give a security, it can be land or machinery, which is 100-150 per cent of the loan value. PSBs are more careful in securing their loans, which is why it is more difficult to get a loan from them, especially for consumers and small borrowers. SMEs need help from the banking system but are not getting it because of these strict loan procedures.”

In this scenario, and in the light of the huge bank scams which have shaken the nation, there has been a lot of demand for the privatisation of PSBs, which are reeling under huge non-performing ­assets (NPAs) worth over Rs 7 lakh crore. Looking at the poor condition of banks and their rising NPAs, a two-year plan to strengthen public sector banks through capital infusion of Rs 2.11 lakh crore was announced by the government last year. This is expected to enable banks play a big role in helping the MSME (Micro, Small and Medium Enterprises) sector. However, Finance Minister Arun Jaitley ruled out privatisation of PSBs for the next one year saying that political ­consensus was needed for this. Many ­experts agree that privatisation, given the current state of social economic development in India, is not possible.

After all, banks in India were nationalised by former prime minister Indira Gandhi in 1969 to serve a social purpose and promote financial inclusion. “In a growing economy, you need credit to be channeled to various industries and MSMEs,” says Pankaj Agarwal, director Ambit Capital. “That is why banks were nationalised. If privatised, will the banks be able to carry on with the government’s agenda of ­financial inc­lusion. It is doubtful. The Jan Dhan scheme was also opened by PSBs while only a fraction of it was with private banks. If PSBs are privatised, it will not be easy for the government to meet its social objectives. Private banks are driven only by the profit motive and are concerned solely about their returns to shareholders. How many private banks have branches in rural areas?”

The pitch for PSB privatisation has been raised by Chief Economic Advisor Arvind Subramanian. He recently said that the privatisation of PSBs was necessary to avoid Nirav Modi-like scams from happening in the future. There have been other voices as well. More recently, Bibek Debroy, chairman, economic advisory council to the prime minister, said that there were governance issues in the PSBs which needed to be cleaned up. Former NITI Aayog vice chairman Arvind Panagariya has  also called for the privatisation of PSBs. But if privatisation were to happen, who would buy these banks with their huge NPAs? Any private sector party will look at profits. Add to that the fact that PSBs are highly unionised and the private buyers will not be able to ­exercise ‘a hire and fire’ policy there. “Politically, it will not be viewed well as there will be job losses, this kind of a move will not be taken up,” says Abizer Diwanji, partner and national leader, Financial Services, EY India.

Diwanji feels that for privatisation to happen, there has to be a gradual ­improvement in PSBs so that they ­become ­attractive buys. This would include strengthening their human resources and improving salaries to be at par with private sector banks. The 2015, seven-­pronged PSB reform plan called Indradhanush can come as a regulation. “The government should pool all PSB stakes into one holding company and privatise 26 per cent of that. If you merge all the PSBs, a 26 per cent stake of that can fetch the government at least Rs 2 lakh crore,” says Diwanji. But considering that the government is already in the election mode for 2019, it is unlikely that it will undertake a politically sensitive issue of public sector bank privatisation.