The Moral Maze of PSBs: Profit Motive versus Social Responsibility

Public Sector Banks (PSBs) in India were founded with a noble mission: to promote inclusive growth and serve the underprivileged. However, recent trends suggest a concerning shift towards profit maximisation, potentially undermining the core values that defined their inception.

The transformation of PSBs can be likened to the “Feldman of Bagel Theory” from Freakonomics. Just as Paul Feldman’s honest bagel business saw a decline in integrity when he wasn’t personally overseeing it. PSBs under leaders like Raj Kumar Talwar exemplified honesty and commitment to social good. Talwar’s steadfastness in the face of political pressure, such as his refusal to waive farm loans despite potential backlash, represents a bygone era of principled leadership.

In stark contrast, the recent electoral bond scandal at State Bank of India (SBI) under Dinesh Khara raises serious questions about current priorities and ethical standards.

Public Sector Banks (PSBs) have increasingly prioritised profitability, creating a paradox where financial health is achieved at the expense of their social mission. This shift is evident in the aggressive sales targets and the promotion of ancillary products that resemble the tactics of private banks. These practices often alienate the underbanked population, who may find these strategies intimidating and counterproductive to their financial inclusion.

Advocates of privatisation argue that it would enhance efficiency and profitability. However, a complete shift to private ownership could neglect the underprivileged, leaving them vulnerable to market forces that prioritise profit over social welfare. Striking a balance between profitability and social responsibility is essential to maintaining the original mandate of PSBs.

The "Bob World" fiasco at Bank of Baroda and the SBI electoral bond case are just the tip of the iceberg, highlighting a deeper cultural issue within the PSBs. These incidents reflect a broader trend where short-term gains and career advancement are prioritised over ethical conduct. This “master’s happiness” approach, where PSB leaders align with government agendas at the expense of prudent banking practices, results in schemes that create bad debt and jeopardise financial stability.

The decline in ethical standards within PSBs can be partly attributed to the absence of strong, principled leadership. Without leaders like Raj Kumar Talwar, who stood firm against unhealthy practices, PSBs are more vulnerable to political pressures and profit-driven motives. This has led to a banking culture where dishonesty and manipulation become rampant, mirroring the “Feldman effect” where unethical behaviour increases as one ascends the hierarchy.

Drawing parallels from the Feldman effect, where dishonesty increases with hierarchy, a similar trend is evident in today’s Public Sector Banks. As the culture of prioritising profit and pleasing political leaders takes root, it cultivates a generation of leaders more focused on personal gain than public service. This cultural shift is clear in the implementation of government-led social security schemes like Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), and Atal Pension Yojana (APY). While these schemes are beneficial in intent, they are often forcefully debited from customers’ accounts, reflecting a disregard for ethical banking practices. Additionally, the bundling of insurance packages with loans or savings account openings is another example of how profit motives override customer welfare. Such practices erode trust and undermine the core values on which PSBs were founded.

To restore the moral fabric of PSBs, several steps need to be taken:

·   Include social impact indicators alongside financial metrics in performance evaluations to ensure a balanced approach.

·   Implement stricter regulations and establish independent oversight bodies to monitor ethical conduct and prevent future scandals.

·   Designate specific PSBs to focus on financial inclusion for underserved populations, offering tailored products and services.

·   Develop a framework that allows PSBs to pursue profitability while remaining true to their social mission.

The moral decline of PSBs is a pressing concern that demands immediate attention. The solution lies not in complete privatisation, but in fostering ethical leadership, promoting financial inclusion, and balancing profit with social goals. By taking these steps, PSBs can reclaim their rightful place as drivers of inclusive growth in India.

[The author is a banking expert and writes on India's banking sector. The views are personal.]