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Why We Need More & Not Less Government Intervention In Banking System?

If the moral position is abandoned and the alternate view of the government as the first entrepreneur is accepted, more rather than less government intervention will be welcome during banking crises in the present and future.

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The banking system with government and private players is the key driver of the Indian economy. Through the key function of lending, the banks unleash the hidden economy.  When the government banks do not detect innovative business models or lack adequate capital to lend, private banks step in and using informal networks play a key role in financing the economy.  Old Generation private banks such as Catholic Syrian Bank, Karur Vysya Bank, and Karnataka Bank are few examples of private banks that satisfied the needs of a closely-knit community through informal networks. The new generation private banks such as ICICI, Axis and HDFC Bank on their part have played a key role in increasing banking penetration by their massive investments in technology and customer service. However, this portrayal of the private banks belies the fact that several private banks in the recent past have faced issues of closure, loss of customer support besides regulatory pressure. 

The banking system in the country is not a paragon of excellence overall. Recent bank failures have been portrayed as due to entrepreneurial overdrive, poor credit controls, and outright fraud. The financial intelligence agencies are able to put together the information and prosecuting the wrongdoers. 

The economist, Maria Mazzucato, portrays an enlightened government as the first entrepreneur in any risky venture. True to this observation, the recent coronavirus scare is being dealt with first by the various government bodies; the security personnel in the airport, the government doctors, nurses, and hospitals. The testing and screening are being done in government labs. All this is done, partly as part of the democratic contract and also by the sheer resources a state alone can command. At best a private hospital could provide care for a small airport, but a high risk spread such as the coronavirus is dealt best by the biggest entrepreneur, the Government. The gains may be marginal. At best, India could be a co-producer of coronavirus vaccines and at worst, could provide samples to support the WHO in its research. As customers in New York emptied the shelves of hand sanitizers, the state government there is producing its own sanitizers, another example of government as the first entrepreneur during the time of crisis. To defeat the COVID- 19, a small US federal government agency, BARDA (Biomedical Advanced Research and Development Authority) is rapidly disbursing venture capital to potential vaccine manufacturers.

We see a similar role of the government as the first entrepreneur in the arena of finance too. It is to government bonds that banks run to when fleeing from risk. Government lending and deposits are a much sought after business for banks. These government deposits lend a much-needed ballast for banks. The role the government has played in the banking system is today not visible in the size and composition of the balance sheet of the public sector banks. Leading Fintech, IT, and manufacturing companies prefer loan deals with private players and ignore the public sector banks. The government, on the other hand, is content to allow its authorized officials (Enforcement Directorate, Reserve Bank of India to deal with the erring officials and then step in with players in the public sector to rescue the private players, only to save the economy from Domino (contagion effect) The State Bank is involved in the rescue of the YES Bank with the clear mandate of the RBI and the government. The Indian customer clearly sees the hand of the government in rescuing the YES bank.

The government must awaken its hidden potential and put it to excellent use. The arm’s length transactions are not needed. They are contrived and do not solve the entire problem. 

Among the many similarities noticed in the pandemic covid19 and the “virus” in the banking sector, the most visible is that both have destroyed value in the stock and money markets.  The government has put in full use the state machinery in containing the former. Governments are united all over the world to fight this deadly virus.  Countries have put aside their differences and political parties, their ideological differences for this cause. There is no blame game and witch-hunting. The solution to the problem has taken precedence overall. 

We see a similar role for the government in containing the virus in the banking sector, their full involvement and not just proxy involvement through the PSU bank. For such a proactive system, the government must create an apolitical watchdog to monitor the banks. The moral issue which blocks governments from action is of the ever-present criticism dished out “it's not the government's business to be in business”. This moral position is bandied during the good times and during the terrible times, the same commentators pillory the RBI, the Government and its ministries for lack of action. In our view, if this moral position is abandoned and the alternate view of the government as the first entrepreneur is accepted, more rather than less government intervention will be welcome during banking crises in the present and future.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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banking coronavirus outbreak

Meera Aranha

The author is Professor (Finance area), Chair for the PGDM program in Banking and Financial Services (BKFS), T A Pai Management Institute, Manipal

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Srinivasa Reddy

The author is Assistant Professor (Marketing Area), T A Pai Management Institute, Manipal

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