Privatisation of Public Sector Banks

During Union Budget 2020-21, the government announced a new policy for strategic disinvestment of public sector undertakings. This policy provides an explicit schedule for disinvestment in all non-strategic and strategic sectors. The Banking sector falls under the strategic industry. The government aims to keep a low presence in the strategic sector. After a massive consolidation exercise in 2019, Public Sectors Banks (PSB) reduced from 28 to 12.

Recently, the NITI Aayog consolidation plan removed 6 PSBs out of the Privatisation plan. The NITI Aayog proposed privatising all the PSBs except the SBI, Indian Bank, Union Bank, Bank of Baroda, Punjab National Bank, and Canara Bank. Further, the government also decided to perform the privatisation of two PSBs in the next fiscal year.

Importance of Private Sector Banks

Professional Management: The private sector banks will introduce a high degree of professional management and marketing into banking. It enables the public sector banks to develop similar skills and technology.

Creates Healthy Competition: The private sector banks offer healthy competition on efficiency and performance in the banking industry.

Attracts Foreign Direct Investment: The private banks, especially the foreign banks, can influence the foreign direct investment in India.

Access to Foreign Capital Markets: The foreign banks can help the companies and the government agencies to meet their financial needs from international markets.

Innovation in the Banking Sector: The private sector banks always try to innovate new product avenues like new schemes, services and make the industries achieve expertise in their fields by offering quality service and guidance. This helps the public to choose suitable options.

Introduction of new technology: New technologies in the banking sector will lead the other banks in various new fields. For example, the introduction of computerised operations, credit card business, ATM service, etc.

Reasons for Privatising Public Sector Banks

Increasing Non-Performing Assets: RBI data shows that 9.3 per cent of the industry loan book for private sector banks instead of 28.8 per cent for PSBs by March 2017. As of end-March 2016, RBI data showed that public sector banks accounted for over 90 per cent of the Rs. 5.5 lakh crore gross NPAs with banks.

Poor Lending: PSBs have been criticised for inadequate risk controls, poor lending decisions, and bad governance.

Previous reform measures have not yielded results: Years of capital injections and governance reforms have not significantly improved public sector banks’ financial position. Many have higher stressed assets than private banks, but they delay profitability, market capitalisation, and dividend payment record.

Aligned with Long Term Goal: Privatisation, public sector banks, will initiate a long-term project involving only a handful of state-owned banks. The rest either combined with strong banks or privatised.

Reduces Government Burden: Privatisation will free the government, the majority owner, from providing equity support to the banks year after year. The government front-loaded Rs 70,000 crore into government-run banks in September 2019, Rs 80,000 crore in 2018, and Rs 1.06 lakh crore in 2019 through recapitalisation bonds. It will be another step towards reducing the fiscal deficit and financing revenue expenditure through revenue receipts in the long term.

Rationalisation of Banks in Post-COVID Scenario: After the Covid-related regulatory relaxations are removed, banks are expected to report higher NPAs and loan losses. This would mean the government might have to inject equity into weak public sector banks. The government is trying to strengthen the solid banks and also reduce their numbers using privatisation.

Changed Approach to Financial Sector Problems: Privatisation and setting up an asset reconstruction company entirely owned by banks show a different approach to finding market-led solutions to challenges in the financial sector.

Private Participation promotes innovation in the market: Private Banks’ market share in loans rose to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%. They have expanded the market share through new innovative products, the latest technology, and better services.

Efficiency, financial prudence and governance: There is a belief that the public sector equates to inefficiency and corruption, while private ownership automatically brings efficiency and financial management. Also, privatising a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, which will have a ripple effect on other PSBs. Better financial performance is guaranteed when a strong financial institution is involved as a significant shareholder in privatisation.

However, the wholesale privatisation of public sector banks is not the solution for the complex problems in the industry. The risk management at PSBs needs to be taken to a higher level, which requires strengthening PSB boards with efficient and qualified professionals. The boards of state-backed banks should not have any political influence. Managers should be held responsible for operational performance, and there should be close monitoring of targets, risk assessment, and credit controls.

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This post was last updated on November 7th, 2021 at 11:26 am

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