Privatization of PSBs – Explained, Pointwise


The Government has fast-paced the privatization of PSBs(Public Sector Banks).  Recently NITI Aayog released its last round of consolidation plans. In that, the NITI Aayog listed 6 banks for the privatization plan.

On the other hand, the employee unions of Public Sector Banks have gone on a two-day strike against privatization. Further, A joint platform of 10 Central trade unions also observed last Monday as “anti-privatization day”.

But the government refused to stop the Privatization of PSBs. The government stated that some PSBs are incurring losses, and it can no longer take care of them. In this article, we will analyze the important aspects of the Privatization of PSBs.

What is the government plan on the Privatization of PSBs?

During Union Budget 2020-21 presentation, the government announced a new policy for strategic disinvestment of public sector enterprises. This policy provides a clear roadmap for disinvestment in all non-strategic and strategic sectors. The Banking Sector falls under the strategic sector.

The government aims to keep a bare minimum presence in the strategic sector. The final number of Public Sector entities in strategic sectors(including banking) will be determined by a group of ministers.

In 2019, after a massive consolidation exercise, the no. of PSBs reduced from 28 to 12. Recently the NITI Aayog consolidation plan left 6 PSBs out of the Privatization plan.

The NITI Aayog suggested privatizing all the PSBs except the SBI, Union Bank, Punjab National Bank, Canara Bank, Indian Bank, and Bank of Baroda. Further, the government also decided to perform privatization of two PSBs in the next fiscal year.

The PSB workers opposed the Privatization of PSBs right from the beginning. Nearly 10 lakh PSB employees, officers, and managers protested for two days against the Privatization of PSB plans last week.

Contribution of PSBs so far

According to RBI data, there were only 1,833 bank branches in rural areas in the country in 1969. But after the nationalization in the 1970s, the rural branches increased to 33,004 by 1995 and continued to grow over the next decades. This provided various benefits to economic development. Such as,

  • PSBs expanded agricultural credit, short-term agricultural credit (‘crop loans’). According to an estimate, the PSBs in 2017-18 account for a total of Rs 622,685 crores of Agricultural credit. Further, The PSBs also played a huge role in making the country self-sufficient by supporting the green, blue, and dairy revolutions.
  • The PSBs pioneered the concept of ‘priority sector lending. This provided credit to certain priority sectors which were earlier deprived of credit such as housing, etc.
  • The Differential Rate of Interest (DRI) loans are the brainchild of public sector banking. Under this poorest section of people will receive the loan at a very marginal interest rate.
  • The PSBs extended loans to women’s self-help groups under various programs. This contributed to women’s empowerment in India.
  • PSBs also funded rural infrastructure projects through the Rural Infrastructure Development Fund.

In conclusion, the PSBs provided access to a formal banking network for all and facilitated financial inclusion in India.

The rationale behind the Privatization of PSBs
  1. The problem of NPAs: The banking system is overburdened with non-performing assets (NPAs). The majority of which lies in the public sector banks. For example, In 2020 the amount of NPAs with the PSBs was about Rs 5.47 lakh crore. This is more than twice the amount of NPAs in Private sector banks(Rs 2.04 lakh crore).
  2. Issue of Dual Control: At present PSBs are under the dual control of RBI and Dept. of Financial Services of Min of Finance.
    • The RBI handles the governance side of the PSBs under the RBI Act, 1934
    • On the other hand, the Dept of Financial Services under the Finance Ministry maintains the regulation of PSBs under the Banking Regulation Act, 1949.
    • Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. The Privatization will provide the powers to RBI to control them effectively.
  3. Reduced performance: The PSBs in the past failed to perform effectively when compared to Private banks. This will result in a loss for the government at the end of the day.
    For example, The PSBs had almost 71% of the overall lending ratio in 2005. But in 2020 their overall lending ratio came below 57% due to intense competition from the Private banks.
  4. Public sector bank boards are still not adequately professionalized. Further, the Bank Board Bureau is not fully functional. So the government still decides board appointments. This creates an issue of politicization and interference in the normal functioning of Banks.
  5. A difference of Incentives: PSBs are disrupted by government schemes like farm loan waivers etc. On the other hand, Private banks are profit-driven. The shareholders maintain effective control over banks’ functions. So, they can improve the balance sheet of the PSBs after privatization.
Arguments against the Privatization of PSBs

The supporters of PSBs provide many arguments against the privatization of PSBs. Such as,

  • The credibility of Private Sector Banks: The Private sector bank is not always efficient. On a global level, there are many private banks that have failed, thus challenging the idea of private banks are efficient. For example, the recent YES Bank problem in India.
  • Reason for NPA’s: The present NPA problem lies majorly with the PSBs. But the NPA’s increased due to the credit provided to the private corporate entities. So the private corporate entities have to be regulated and not the PSBs.
  • Against inclusive banking: The Private Sector focussed on profit motive might restrict the credit to rural, agricultural, women, poor sections of society, etc. Thus, after Privatised PSBs the remaining PSBs have to take care of all of such credits. This might stress the remaining PSBs also.
  • Governance and policy issue of RBI: Restructuring schemes such as strategic debt restructuring and schemes for sustainable structuring of stressed assets, initiated by RBI, are the major reasons for delayed recognition of bad loans from banks. This is applicable to all banks irrespective of ownership (public as well as private) of the banks.

For these reasons only the Former governor of RBI, Raghuram Rajan also opposed the Privatization of PSBs. He also mentioned that India at present needs changes in banking regulation.

  1. Proper implementation of the recommendations: The government must properly implement the recommendations of various committees. Such as,
    • Recommendation of PJ Nayak Committee:
      • Though the government approved the Bank Board Bureau, the government has to provide enough support for proper functioning.
      • The government can split the Chairman and Managing Director roles. Further, the state can allow them a fixed tenure of 3 to 5 years.
    • Recommendations of Narashimham committee
      • The government can review the Banking Regulation Acts.
      • India can explore the concept of Narrow Banking. Under this weak PSBs will be allowed to place their funds only in the short term and risk-free assets. This will improve the performance of PSBs.
  2. Apart from that, The government has to create strong recovery laws and taking criminal action against wilful defaulters. 
  3. The government has to rectify the challenges in the Insolvency and Bankruptcy Code. This will provide a faster resolution process.
  4. In the meantime, the government can explore alternate steps such as the concept of Bad Banks.

The majority of the Committees appointed by the government including the PJ Nayak Committee supported the reduction of government stake in PSBs. So, the government has to strike a balance on how much privatization of PSBs is essential for financial inclusion and credit to essential sectors like infrastructure, rural, etc. Instead of providing arbitrary numbers, the government have to provide the rationale behind the bare minimum presence in the strategic sectors including PSBs

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