Big bang privatization of banks can be harmful: RBI article

Source: The post is based on the article “Big bang privatization of banks can be harmful: RBI article” published in The Hindu on 18th August 2022.

What is the News?

The Reserve Bank of India(RBI) has published a bulletin which suggests that a big bang approach to privatization of government-owned banks may do more harm than good.

What are RBI’s views on the privatization of public sector banks?

According to the RBI bulletin, a big bang approach to privatization of public sector banks may do more harm than good. This is because:

Firstly, while private banks (PVBs) are more efficient in profit maximization, their public sector counterparts have done better in promoting financial inclusion.

Secondly, private banks have failed to cater to the customers of the rural and semi-urban areas to date and customers from such locations are relying heavily on PSBs for banking.

Thirdly, market confidence tends to be in favour of PSBs in terms of crisis. At the onset of the global financial crisis, deposits flew out of private banks to PSBs. The outflows happened despite these banks offering relatively higher interest rates than others.

What are RBI’s views on reforms in the banking sector?

Recent mega-mergers of Public Sector Banks(PSBs) have resulted in the consolidation of the sector, creating stronger and more robust and competitive banks.

The establishment of the National Asset Reconstruction Company Limited(NARCL) would help in cleaning up the legacy burden of bad loans from their balance sheets.

The recently constituted National Bank for Financing Infrastructure and Development(NABFiD) would also provide an alternative channel of infrastructure funding, thus reducing the asset-liability mismatch concerns of PSBs.