[Answered] State-owned banks mustn’t be completely privatized, these lenders still have a valid role to play. Discuss

Privatization refers to the process by which the private sector assumes operational or financial control of public institutions. In other words, privatization entails the abolition of all government controls and involvement in the establishment of supply and demand mechanisms.

Why State-owned banks must not be completely privatized?

• PSBs have a role to play in the ongoing formalization of credit, financial inclusion and also in providing the Centre and states with transaction processing platforms for the delivery of direct benefits to underserved Indians. The private sector can be brought in scale efficiencies and productivity gains, but not designed to provide these services.
• Driven by the profit motive, private sector banks concentrate on the more affluent sections of the population and the metropolitan/urban areas; therefore, lead to the financial exclusion of the weaker sections of the society, particularly in the rural areas.
• Indian customers prefer the safety and security of their deposits offered by the PSBs.
• The primary motive behind disinvestment so far has been to fill gaps in the Centre’s budget, not to achieve a step-change in the working of PSBs.

Reasons for complete privatization:

• It will improve capital allocation efficiency and overall productivity.
• It is well known that PSBs bring down the average productivity of India’s financial sector with their sluggish networks, outdated systems, NPAs and stifling bureaucracy. In addition, weak incentives result in poor decision taking.
• Privatization aids in keeping the consumer requirements the topmost cause for economic development. It also helps the government clear company debts and increases long-term jobs in the market.
• The majority of the private banks are successful, to a considerable extent. Many PSUs are still stagnant and unable to profit.
• The majority of foreign investors favour investing in private sector banks over those in the public sector. Hence, it benefits the economy through foreign investment funds as well.

Privatization of banks is not a remedy to all solutions. The Government should also focus on comprehensive governance reforms, resolution of NPAs, and creating a free market so that investment can be revived and wheels of the economy can again get back on track.