Privatisation of Banks

In News

• Government is likely to introduce a bill in the upcoming session of Parliament to facilitate the privatisation of banks.

Why the government is focusing on privatisation?

• Minimising governance:
  • Government wants to minimise its presence in different sectors where private industry is relatively more competent.
  • This market-led approach is also reflected in the creation of Asset Reconstruction Company for solving the financial crunch.
• Profitability:
  • Public banks lag on profitability, market capitalisation and dividend payment record.
• Stressed assets:
  • The Non-Performing Assets (NPAs) and stressed assets have increased in number, especially amidst pandemic.
  • The government is taking all the possible measures to ensure that the country doesn’t end up being in deficit financing mode and privatisation could be one of the best ways out.
• Other benefits of privatization:
  • Less effective bank mergers & infuse better management policies.
  • No political interference & prompt decision-making.
  • More employment opportunities in the sector for a large section of educated youth.
  • More accountability to shareholders.
  • Better use of technology by private banks.
  • Improves inflow of Foreign Direct Investment (FDI) or investment.

Government steps for privatisation of PSUs:

• In the Union Budget for 2021-22, the government announced its intent to take up the privatisation of two PSBs (Public Sector Banks) in the year and approved a policy of strategic disinvestment of public sector enterprises.
• Government think-tank NITI Aayog has already suggested two banks and one insurance company to the core group of secretaries on disinvestment for privatisation. 
• Banking Laws (Amendment) Bill, 2021:
  • The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by finance minister Nirmala Sitharaman in the Union Budget 2021-22. 
  • The Central Bank of India and Indian Overseas Bank can be 2 candidates for the bank privatization move.
    • This will bring down the minimum government holding in the PSBs from 51% to 26%.

Challenges/Criticisms:

• Social responsibility:
  • It is perceived that the private sector is not sufficiently aware of its larger social responsibilities and is more concerned with profit.
  • Public sector banks (PSBs) have deeper penetration in rural India as well in terms of deposit and lending facilities
• Private players in the financial sector are prone to failure: 
  • The world felt the shock waves as the financial markets collapsed in 2008, caused by over-reaching private players. 
  • We have a long history of private bank failures. 
    • After the formation of the Reserve Bank of India in 1935 and up to the period of our getting Independence (1947), there were 900 bank failures in our country. From 1947 to 1969, 665 banks failed. 
      • The depositors of all these banks lost their money.
• Efficiency of private banks:
  • Experts pointed out repeatedly that it would be wrong to claim that private banks are more efficient, rather, there have been instances when PSB intervened to support a private bank.
  • NPAs (non-performing assets) have been disproportionately high even in private banks. 
  • Experts believe that NPA is the reflection of the economic system and whenever there will be stress, NPAs would go up.
• Matter of faith:
  • The common man feels that a government bank cannot fail and his money is safe. 
  • Disturbing this structure will, therefore, be dangerous.

Way ahead:

• As pointed out by analysts, the government should not ideally be in any business but we are a developing nation, so we need the intervention of the government in the banking sector.
• Reserve Bank of India needs to bring proper enforcement of regulations before privatisation happens.