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Privatisation of Banks

Posted on May 31, 2022 by admin1  1003

In Context 

  • Advance action is underway for privatisation of two public sector banks in pursuance of the announcement made by finance minister Nirmala Sitharaman.

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’.

About 

  • 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. 
  • Well-known economist Arvind Panagariya has advocated that the government must accelerate privatisation of public sector enterprises and begin the process of privatisation of public sector banks. 

Rationale behind Privatisation of Banks 

  • Government wants to minimise its presence in different sectors where private industry is relatively more competent.
    • This market-led approach also reflects in the creation of Asset Reconstruction Company for solving financial crunch.
  • Public banks lag on profitability, market capitalisation and dividend payment record.

Why were private banks nationalised in the first place?

  • Then Prime Minister Indira Gandhi, who was also Finance Minister, decided to nationalise the 14 largest private banks on July 19, 1969. 
  • The idea was to align the banking sector with the socialistic approach of the then government. 
    • State Bank of India had been nationalised in 1955 itself, and the insurance sector in 1956.

What has been the government and RBI stand on privatisation since 1969?

  • The UPA government of 2004-14 refrained from taking any decision on privatisation. 
  • Many committees had proposed bringing down the government stake in public banks below 51% — the Narasimham Committee proposed 33% and the P J Nayak Committee suggested below 50%. 
  • An RBI Working Group recently suggested the entry of business houses into the banking sector. 
  • The NDA government, in its second term, has been pushing for privatisation.

Benefits 

  • With the help of nationalisation small borrowers could get credit and there will be a shift from class banking to mass banking. 
    • The nationalisation of private banks in 1969 resulted in the opening of tens of thousands of branches in remote corners of the country.
  •  Job opportunities are created for a large section of educated youth. 
  • No political interference & prompt decision making.
  • More profitability & accountability to shareholders.

Issues linked to Privation 

  • It is perceived that the private sector is not sufficiently aware of its larger social responsibilities and is more concerned with profit.
  • 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 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.
  • The common man feels that a government bank cannot fail and his money is safe. 
    • Disturbing this structure will, therefore, be dangerous

Conclusion

  • Privatisation is likely to succeed in the present changed scenario. Reasons are as follows.
    • Private banks are now more responsible towards the fulfilment of social goals rather than narrow profit motives.
    • Private banks are now with more diverse loan portfolios and taking the help of technology to increase their customer base.
  • The government should also be cautious and ensure enough safeguards to ensure pre 1960s situations of rampant private banks failures do not re-emerge.
  • Strengthening of  RBI’s regulation over PSBs is required .
  • The government must ensure better supervisory mechanisms of banks instead of attempting wholesale privatisation.

Source:FE

 
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