Is Privatisation a Remedy to the poor Banking Health of India or just a Farce?

by Shatakshi Gupta

For the past few years, we have been listening to diverse views of people on bank privatization. Both privatization and the Nationalization of banks have faced hue and cry in this country. Recently the government has decided to revisit some key aspects of the Banking Laws (Amendment) Bill 2021, which aims to privatize two public sector banks (PSBs) during the winter session of Parliament.  Privatization. Today, in this article, we will tell you about the pros and cons of bank privatization and leave you to form an informed opinion.

Nationalisation vs Privatisation:

The transfer of ownership, property or business from the government to the private sector is called privatization. Under this, the government ceases to be the owner of the entity or business. Privatization is healthy from the point of view of bringing more efficiency and fairness in the operations of bank. India moved towards privatization after the landmark 1991 reform, also known as the ‘New Economic Policy or LPG Policy’.

 Whereas, Nationalization is the process of placing privately controlled companies, industries or assets under the control of the government. This often occurs in controlled economies and reflects a country’s desire to centralize assets or assert its dominance over foreign-owned industries.

Stand of various regimes in India

The union government of India had decided to nationalize the country’s 14 largest private banks in the year 1969, with the aim of aligning the banking sector with the socialist vision of the then government. The State Bank of India (SBI) was nationalized in the year 1955 and the insurance sector of the country in the year 1956.

Various governments in the last 20 years have been against the privatization of public sector banks. In the year 2015, the government had submitted a suggestion for privatization, although the then Governor of the Reserve Bank of India (RBI) was not in favour of this idea.

Also read: How Floating Interest Rate Loans Are Different From Fixed Interest Rate Loans? Know Pros And Cons

Why PSBs need to be privatised?

  • Even after years of capital investment and governance reforms by the central government, the financial condition of public sector banks has not improved significantly. Many of these public banks have significantly higher stressed assets than private banks and also have poor profitability, market capitalization and dividend pay-out records.
  • The privatization of the two public sector banks will mark the beginning of a long-term project that envisages a select few public sector banks in the Indian banking sector. The initial plan of the government was to privatize four banks.  After the successful privatization of the first two banks, the government may focus on disinvestment of the other two or three banks in the coming financial years. This decision will free the government, which is the largest stakeholder in the banks, from the obligation to provide financial assistance to the banks year after year.
  • The government is trying to make the big banks more strong and the number of banks is also being reduced through privatization.
  • Also, the main function of any government is governance, not the business. Privatization of banks will set the government free from business management so that the government will be able to focus more on governance.
  • Besides, several committees have proposed limiting the government stake in public sector banks to 51%. The Narasimhan Committee had talked about limiting the stake to 33%. PJ Nayak committee had suggested reducing the stake to below 50%. Recently a working group of RBI has suggested the entry of big business houses in the banking sector.
  • Another major objective behind privatization is to create bigger banks. Unless privatized public sector banks are merged with existing large private banks, they may not develop high-risk appetite and lending capacity.

As such, privatization is a multi-faceted task, considering all approaches to tackle many challenges and inventing new ideas, but it also paves the way for developing a more sustainable and robust banking system to benefit all stakeholders.

Various concerns regarding privatization:

  • Privatization of public sector banks is tantamount to selling banks to private companies, many of which have not repaid the loans of PSBs, giving rise to crony capitalism.
  • Privatization will affect activities like unemployment, branch closure and financial exclusion. Privatization will reduce employment opportunities for Scheduled Castes, Scheduled Tribes and Other Backward Classes (OBCs) as the private sector does not follow the reservation policies for weaker sections.
  • Private sector banks focus more on the more affluent sections and population of metropolitan/urban areas, leading to financial exclusion of weaker sections of the society, especially in rural areas.
  • Public sector banks make banking accessible to rural areas and ensure financial inclusion. They have expressed apprehensions that if public sector banks are privatized, these benefits may be adversely affected.
  • Bank unions have named the privatization process a “bailout operation” for corporate defaulters. Critics say that private sector is responsible for large scale bad loans and they should be punished for this crime. The government should not reward them by handing over banks to the private sector.

Read more: What are Digital or Neo Banks? Why you should opt for Neo Banking?

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