Privatisation of Banks

In News

• Recently, RBI has warned that big-bang privatisation of public sector banks can do more harm than good.

Key Findings

• While private sector banks (PVBs) are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion.
  • PSBs (Public Sector Banks) have played a key role in catalysing financial investments in low-carbon industries, thereby promoting green transition in countries such as Brazil, China, Germany, Japan, and in the European Union.
  • PSBs were not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks.
• Countercyclical role of PSB lending: In the recent years, these banks have also gained greater market confidence. 
  • Despite the criticism of weak balance sheets, data suggests that they weathered the COVID-19 pandemic shock remarkably well.
• The gradual approach to privatisation adopted by the government could ensure that a void was not created in fulfilling the social objective of financial inclusion and monetary transmission.
• Recent mega mergers of PSBs have resulted in consolidation of the sector, creating stronger and more robust and competitive banks.
  • In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12. .
• The establishment of the National Asset Reconstruction Company Limited (NARCL) would help in cleaning up the legacy burden of bad loans from their balance sheets.
• The recently constituted National Bank for Financing Infrastructure and Development (NABFiD) would provide an alternative channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs.

What is ‘Privatisation’?

• The transfer of ownership, property or business from the government to the private sector is termed privatisation. 
• The government ceases to be the owner of the entity or business.
• It is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about. 
• India went for privatisation in the historic reforms budget of 1991, also known as ‘New Economic Policy or LPG policy’.

Need for Privatisation

• Aggravated high Non-Performing Assets (NPAs) and stressed assets amidst pandemic.
• To strengthen the strong banks and also minimise their numbers through privatisation to reduce its burden of support.
• Less effective bank mergers & infuse better management policies.
• No political interference & prompt decision making.
• More profitability & accountability to shareholders.
• Improves inflow of Foreign Direct Investment (FDI) or investment.
• Recommended by Narasimham Committee (proposed 33% govt. stakes), P J Nayak Committee (
• Better use of technology by private banks

Benefit of Privatisation

• 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.

Why is the government 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.

Arguments Against

• Performance Concerns (Lakshmi Vilas Bank’s operational issues, ICICI bank’s dubious loans sanctions, Yes Bank case etc.)
• This move will result in financial exclusion and promote crony capitalism.
• This will remove the sovereign guarantee behind the PSB deposits and make household savings less secure.
• Under Reporting of NPAs- 2015 Asset Quality Review by RBI.
• Concerns of successful disinvestment.
• Defeats goal of financial inclusion (failed Priority Lending Targets).
• Non-sharing of government’s social responsibilities (Violation of DPSP under Article 38).
  • Privatisation will shrink employment opportunities for Scheduled Castes, Scheduled Tribes and Other Backward Classes (OBC) since the private sector does not follow reservation policies for the weaker sections.

Way Ahead

• From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it.
• These reforms were likely to help strengthen PSBs further.

Source: TH