Privatization of Banks

The RBI recently issued a warning that the big-bang privatisation of public sector banks could have a negative net impact.

Findings

• Although public sector banks have performed better in fostering financial inclusion, private sector banks (PVBs) are more effective at maximising profits.
• Public sector banks (PSBs) have been essential in accelerating financial investments in low-carbon sectors and advancing the green transition in nations including Brazil, China, Germany, Japan, and the European Union.
• In contrast to private sector banks, PSBs were not solely driven by the goal of maximising profits and instead included the desirable goals of financial inclusion in its target function.
• PSB lending's countercyclical functions, in recent years, the market has grown more confident in these banks.
• Despite criticism for having poor balance sheets, research indicates that they fared extremely well throughout the COVID-19 pandemic shock.

Government Measures:

The government's methodical approach to privatisation might ensure that the societal goal of monetary transmission and financial inclusion was not compromised.

• Recent massive mergers of PSBs have led to industry consolidation, generating stronger, more resilient, and more competitive banks.
• By 2020, there were only 12 PSBs when the government combined 10 nationalised banks into four sizable institutions.
• The National Asset Reconstruction Company Limited (NARCL) establishment would assist in eradicating the historical burden of bad loans off their balance sheets.
• The recently established National Bank for Financing Infrastructure and Development (NABFiD) would offer a different route for funding infrastructure, allaying PSBs' worries about asset liability mismatch.

What is 'Privatisation'?

• Privatization is the process of transferring ownership, assets, or businesses from the public to the private sector.
• The corporation or business is no longer owned by the government.
• It is thought to increase the company's efficiency and objectivity, things that a government-run business would not care about.
• In the landmark reforms budget of 1991, commonly referred to as the "New Economic Policy" or "LPG policy," India opted for privatisation.

Need for Privatisation

• Amid the pandemic, there are heightened high non-performing assets (NPAs) and stressed assets.
• To lessen their numbers through privatisation and strengthen the strong banks in order to ease the burden of support.
• Mergers of ineffective banks that improve management practises
• No political meddling; quick decision-making.
• Increased profitability and shareholder accountability.
• Enhances foreign direct investment (FDI) or investment inflow.
• Narasimham Committee (33% proposed government stakes), P J Nayak Committee (below 50%), RBI Working Group, etc. all recommended it.
• Improved technological adoption by private banks

Why is government focusing on Privatisation??

• Minimizing governance: Where private enterprise is comparatively more capable, the government tries to limit its involvement in certain fields.
• Asset Reconstruction Company, which was established to address the financial crisis, is another example of this market-driven strategy.
• Public banks do poorly in terms of profitability, market capitalization, and dividend history.
• Non-performing assets (NPAs) and stressed assets have grown in number, particularly during the pandemic.
• Privatization may be one of the best ways out as the government is making every effort to prevent the nation from entering a deficit financing mode.

Arguments Against

• Performance difficulties (operational problems at Lakshmi Vilas Bank, questionable loan sanctions at ICICI Bank, the Yes Bank case, etc.)
• This action will encourage crony capitalism and financial exclusion.
• Savings held by households will be less secure as a result of the removal of the government guarantee backing the PSB deposits.
• Under NPA Reporting, the RBI's 2015 Asset Quality Review worries about a successful divestiture.
• defeat of the financial inclusion objective (failed Priority Lending Targets).
• refusal to share in the social obligations of government (Violation of DPSP under Article 38).
• Scheduled Castes, Scheduled Tribes, and Other Backward Classes (OBC) employment possibilities may decrease as a result of privatisation because the private sector does not adhere to reservation policies for the disadvantaged groups.

Way forward

Economic theory has come a long way from the common viewpoint that privatisation is a cure-all for all evils to accept that a more nuanced approach is needed while pursuing it. Only extremely poor performing PSBs should be opted for privatization and others should be reformed administratively and technologically for financial inclusion and economic growth.

These changes would probably contribute to the PSBs' continued strength.