Not really. Privatisation is no panacea either

In the wake of the Punjab National Bank scam, some old arguments have once again resurfaced. The first one is that unless wages and compensation are improved drastically in public sector banks (PSBs), incidents like these will continue to recur. The second argument, which Chief Economic Adviser Arvind Subramanian also endorsed, is that the only lasting solution to stop this seemingly endless cycle of fraud in PSBs is to cut the Gordian knot of ownership — privatise banks, and let the private sector’s better management, controls, ability to pay for superior talent and market-driven efficiency deal with the perennial PSB problems of lack of skills, absence of proper accountability and cronyism.

These are seductively logical arguments. After all, it is a fact that compared to their private sector counterparts, public sector managers (in banking and elsewhere) are vastly lower paid, particularly at the top, where the risks are far greater but the rewards starkly lower. And it is a fact that private sector banks overall have lower dud loans (non-performing assets, or NPAs) and report fewer frauds. And as anyone who has tried to open an account with a nationalised bank, or has tried to raise a loan from one, will attest, private sector banks are markedly better at providing these and other services than PSBs.

Combating corruption

This, in fact, fits in with the received wisdom, particularly in the developed world, on the root causes of corruption. In a 2014 blog post, Augusto Lopez-Claros, then director of the Global Indicators Group at the World Bank, posited six strategies to combat corruption. While he didn’t explicitly say so, he suggested that less developed countries, where corruption is perceived to be more pervasive, would benefit the most by looking at these options. One, pay civil servants well. “If public sector wages are too low, employees may find themselves under pressure to supplement their incomes in ‘unofficial’ ways,” he argued. Two, create transparency and openness in government spending. Three, cut red tape (based on the high correlation between the incidence of corruption and the extent of bureaucratic red tape). Four, replace regressive and distorting subsidies with targeted cash transfers. Five, establish international conventions to control cross-border corruption. Six, deploy smart technology to deliver more e-governance.

Incidentally, India has adopted all these six strategies with great vigour in recent times, but whether that has actually led to a reduction in corruption is a different debate. But Lopez-Claros himself admitted in the same article that “an approach that focuses solely on changing the rules and the incentives, accompanied by appropriately harsh punishment for violation of the rules, is likely to be far more effective if it is also supported by efforts to buttress the moral and ethical foundation of human behaviour.”

A state of mind

In fact, there is considerable evidence to suggest that corruption or corrupt behaviour is more a state of mind than anything else. In 2010, Ghana, in a bid to reduce endemic corruption on its highways, decided to double the wages of its traffic policemen. In 2015, a couple of American researchers, using data from more than 2,000 long haul trips in the region, collected by the United States Agency for International Development, found that rather than reducing corruption, the salary policy significantly increased collection as well as the value of bribes by the police, and the amounts given by truck drivers to policemen in total. A comparison with other Ghana government servants found that in total, better-paid policemen were taking just as many bribes as their poorer paid counterparts in other departments. Corruption in neighbouring Burkina Faso, which paid its employees less than Ghana, was no different in scale and intensity. Similarly, in South America, studies on employee behaviour in public hospitals found that wage levels had little to do with corruption — the better paid and the worse paid were equally corrupt, but hospitals which had better audit and supervision mechanisms reported lower levels of corruption compared to those with laxer supervision and control.

In the Indian context, it would be wrong to conclude that better pay would reduce corruption. Yes, private banks report fewer frauds than PSBs but they also account for a much smaller share of the business. (PSBs have around 70% market share.) Relative to scale, their fraud and NPA levels are not significantly different from PSBs.

Neither is privatisation a panacea. Most bank failures in India have been in the cooperative space, or private banks. True, the Reserve Bank of India has not allowed PSBs to fail, forcing mergers in some cases, but here too, the number of such forced mergers is lesser compared to private bank or cooperative bank failures. Don’t forget: Mehul Choksi’s Gitanjali Gems is a listed company with public shareholding, audited reports, independent directors and investor scrutiny. Instead of knee-jerk responses like pointing to pay disparities or ownership, the government needs to urgently tighten scrutiny and oversight mechanisms in banks to prevent future Nirav Modis from pulling off similar scams.