Shut-Down Of Loss-Making Banks Is A Dangerous Idea

By Nantoo Banerjee

It is rather shocking that a former Reserve Bank governor should be urging the government to shut down losing public sector banks (PSB) instead of making them profitable through a judicious process of consolidation. Bank shut-down will severely harm the country’s millions of depositors leading to a major social and economic chaos, in the process. Bank is run with depositors’ money. Depositors trust the system because they trust the country’s central bank and its policies. RBI makes regular appraisal of bank performance and revise bank rates, credit-deposit ratio, etc. If necessary, RBI makes intervention to prevent a bank collapse. Banks are liable to depositors, though only partly. Former RBI governor Duvvuri Subbarao’s latest prescription will only help habitual rich bank defaulters like Vijay Mallya to happily run away with poor depositors’ savings. Last month, Subbarao suggested that the government should be bold enough to “let certain banks die” and bank “consolidation should be done keeping in mind the interest of minority shareholders and bring in greater autonomy for banks. You should let certain banks die. You should have the boldness to cut the flab, reduce staff and branches.” Subbarao’s sudden attack on banks is uncalled for and unfortunate, as well. He did not appear to be concerned about millions of depositors, whose savings are converted into credit or asset by bank management, if the government allows some of its stressed banks “die” an unnatural death.

Most commercial banks — state-owned or privately-held — have a very small number of shareholders if compared with their number of depositors. Yet, Subbarao is concerned more about these shareholders than depositors who do not find a mention in his latest treatise on restructuring of PSBs. What made the former RBI governor come out with such a “bold” idea to let the loss making banks “die” is unclear. It came at a time when the RBI itself is under high financial pressure to manage the adverse impact of demonetisation. Hopefully, the Narendra Modi government will not pay much attention to this former career bureaucrat-turned-RBI governor during the earlier Congress-led United Progressive Alliance (UPA) rule. Subbarao was picked up for the job by his one-time mentor, former finance minister Palaniappan Chidambaram. Assumably, Subbarao’s reaction was not prompted by a mischievous WhatsApp message that has been doing the rounds, listing nine state-owned banks that RBI allegedly plans to shut down. The message ends with a warning for readers to manage their cash deposits immediately. This fake message has certainly a dangerous intent to push a run on these PSBs, creating a major chaos to destabilise the government. The former RBI governor surely knows the import of his frivolous suggestion letting “certain banks to die.”

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