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News: According to media reports, investment banks and other likely investors have recently asked the government to fully withdraw the Centre’s share from PSBs for facilitating a better disinvestment process and value discovery. This raised debate on the privatization of state-owned banks once again.
| Must read: Privatization of PSBs – Explained, Pointwise |
What are the advantages of full privatization of PSBs?
1) Improve capital allocation efficiency and overall productivity by an order of magnitude, 2) Will take care of PSB networks, outdated systems and stifling bureaucracy, 3) Might avoid poor decision-making by providing better incentives.
Other benefits of privatization of PSBs include reduction of public sector dominance of the banking sector and promotion of allocative efficiency.
| Must read: Privatization in India and related issues | Timeline |
What is the legal challenge to the full privatization of PSBs?
But that faces a legislative challenge. Because Section 3(2B)(c) of The Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970 requires the government to hold at least 51% of a PSB’s paid-up capital at all times. The government will have to amend this Act if it wants to sell all its equity.
Other challenges: Formalization of credit, financial inclusion and providing the Centre and states with transaction processing platforms for the delivery of direct benefits to underserved Indians will take a huge hit.
| Read more: Hope fades for PSBs |
What should be done?
End dual governance: The government has to end its twin-track governance model for PSBs, with the regulator always second-guessing the dominant shareholder’s next move.
For example, while the Reserve Bank of India (RBI) must approve the appointment of private bank CEOs, the government’s choice of chief executives is binding on RBI.
Improve governance: The Centre’s tussle with PSB boards gives rise to various forms of rent-seeking and thereby creating a problem of bad loans. The government should focus on improving PSBs standards of governance, rather than simply trying to offload them via bulk stake sales.
These will foster a viable financial sector with both PSBs and Private sector banks to support the Indian economy.
Source: The post is based on the article “Our bank privatization agenda demands clarity” published in “Livemint” on 30th June 2022.
