Government needs to spend more money on education and health than keep 21 banks going

A theme that I have often written about is the sad state of the government-owned public sector banks in India. And from the looks of it, things have only worsened. Take a look at Table 1. It plots the net profit and losses made by the public sector banks and private sector banks, over the last four years. 

The public sector banks have made losses in three out of the last four years. In fact, its losses in 2017-2018 were at a humongous Rs 85,731 crore. In comparison, the private sector banks made a net profit of Rs 41,879 crore. In fact, if we look at just the nine new generation private sector banks, their total profit amounts to Rs 39,001 crore. This, despite the fact that the profit of Axis Bank and ICICI Bank, fell dramatically in 2017-2018.

Over and above this, the Indian banking system has accumulated total bad loans worth Rs 10,35,528 crore or 11.6 per cent of the total advances made by these banks. In September 2017, the bad loans had stood at 10.2 per cent. Bad loans are loans which haven’t been repaid for a period of 90 days or more.

A bulk of the bad loans are on the books of public sector banks. As on March 31, 2018, these bad loans amounted to Rs 8,95,601 crore or 86.5 per cent of the total bad loans of banks. In fact, 15.6 per cent of advances made by public sector banks have been defaulted on. 

In order to keep these banks going, the government has had to keep investing more and more money (i.e. capital) into them, over the years. An estimate made by CARE Ratings suggests that the government has invested a total of Rs 1,70,659 crore into public sector banks between April 1, 2013 and June 30, 2018. 

As can be seen from Table 2, a massive Rs 86,510 crore was invested during the last financial year. During the current financial year, the government has budgeted Rs 65,000 crore towards recapitalising public sector banks. 

This means that between April 2013 and March 2019, a period of six years, the government would have spent Rs 2,26,877 crore to keep public sector banks going. As Madan Sabnavis and Saurabh Bhalerao of CARE Ratings put it in a recent report: “The public sector banks which constitute majority of the banking assets in the country have not generally been as successful as the private counterparts in raising capital from market for various reasons and have depended on the government for their capital requirements.” 

Of course, this does not include money invested by the Life Insurance Corporation of India, in these banks. Every rupee that the government invests to keep the public sector banks going, is money taken away from some other sector, where government presence is more necessary. Take the case of the total amount of money that the government spends on education. In absolute terms the amount of money being spent has increased over the years. In 2013-2014, the central government and state governments spent a total of Rs 3.13 lakh crore or 3.1 per cent of the GDP on education. In 2017-2018, a total of Rs 4.41 lakh crore or 2.7 per cent of the GDP on education. As the Indian economy, has expanded, the proportionate amount of money being spent by the governments on education has come down. 

In the health sector, the proportion of money spent has barely increased from 1.3 per cent of the GDP to 1.4 per cent of the GDP, during the same period. This basically shows that if more money is spent in one area, it essentially gets taken away from another area. It doesn’t take rocket science to say that the government needs to spend more money on education and health, than keep 21 public sector banks going. In fact, a good amount of money has been invested to keep banks which are in a terrible shape, going. 

Take the case of UCO Bank. As of March 31, 2018, it had bad loans amounting to Rs 30,550 crore. This amounted to 24.64 per cent of the total advances of the bank. This basically means around one-fourth of the loans given by the bank, had gone bad. In order to keep this bank going, the government has invested Rs 11,390 crore in the bank, over the years. 

IDBI Bank is another great example. As of March 31,2018, the bad loans of the bank amounted to Rs 55,588 crore or around 27.95 per cent of the total advances of the bank. The government has invested Rs 12,010 crore in the bank, over the years, to keep the bank going. Recently the bank was palmed off to Life Insurance Corporation (LIC) of India. IDBI Bank is now no longer the government’s problem but that of the policyholders of LIC. 

The thing here is that the bank employees are organised and can protest at any step to privatise these banks or even shut them down (some of the smaller banks can easily be shut down). The same cannot be said for people who have to bear the cost of these banks needing more and more money from the government, to keep running. In fact, they don’t even know they are bearing this cost.

The writer is the author of the Easy Money trilogy. Views are personal.