Misguided missive

The RBI’s reported directive to state governments not to give new businesses to private sector banks demonstrates, once again, the pitfalls in using banks to fulfil the government’s social mandate. The RBI has not spelt out its reasons, but it is a fair surmise that the move responds to the private banks’ lack of enthusiasm for meeting various social obligations imposed on banks by the government.

Government ownership places on public sector banks burdens such as participating in schemes like the farm-loan waiver, opening branches in unviable far-flung areas, etc. In the past, banks could enjoy the free float from government funds and that, to some extent, offset the extra costs. However, with electronic transfers, even that advantage has gone.

In such a scenario, the present move is, perhaps, the RBI’s attempt to level the playing field for them with their private sector counterparts. If so, it only compounds the folly of treating banks as anything other than commercial entities engaged in taking deposits from the public, repayable on demand, to meet the demand for capital. Rather than ask public sector banks to subsidise social obligations, the government should give them a free hand and then meet any shortfall from the budget.

Alternatively, it could take a leaf from the telecom book. All telecom operators contribute to a Universal Service Obligation Fund, which is then used to subsidise operations that are socially necessary but commercially unviable. Similarly, all banks could contribute to a Fund whose corpus could be used to subsidise unviable banking operations.

As for the mandate for managing government business, whether of the Centre or the states, it must be given to whichever bank gives the best service at the most competitive (read, least) cost. Anything less would mean hurting the taxpayer twice over; once by using a less efficient instrument (banks) to achieve socio-economic goals and then by not using the most competitive bank to handle government business. Fewer, not more, distortions are the way forward.