How should public sector banks be privatised?

Source: The post is based on the article “How should public sector banks be privatized?” published in The Indian Express on 22^nd August 2022.

Syllabus: GS 3 – Indian Economy

News: In the Union Budget 2021-22, the government announced its decision to privatize two public sector banks.

What were the reasons behind Privatization?

India’s public sector banks have struggled with high levels of non-performing assets (NPAs). High levels of NPAs erode a bank’s profitability.

This has led RBI to put banks under Prompt Corrective Action (or PCA) and forced them to improve their financial performance metrics before being allowed to resume normal banking activities.

Due to the rise in NPAs, PSBs struggled to finance India’s growth needs.

The government even had to recapitalize many PSBs to ensure that they stayed in business. This has drawn criticism of wasting taxpayers’ money.

What are the arguments in favour of the privatization of PSBs?

A recent paper by Poonam Gupta of NCAER and Arvind Panagariya of Columbia University, titled “Privatization of Public Sector Banks in India Why, How and Ho Far?”, argues that “the government should move as rapidly as politically feasible”.

According to the paper published, all PSBs should be privatized.

The paper has taken different metrics to compare Pvt. banks and PSBs. They are:

Gross non-performing assets: The study shows that there has been an increase in the gross non-performing assets of PSBs from 2014-15.

Extending loans: Pvt. banks had a greater contribution towards extending loans.

Deposits growth: Pvt. banks had a higher percentage of contribution to getting deposits from savers.

Number of branches and Employment generation: The report argues that the private banks added more branches and created new jobs while the public sector banks saw declines on both counts.

Fraud Amount: The data reveals that PSBs have higher fraud than Pvt. Banks.

Market capitalization: The Market capitalization of Pvt. Banks is higher than PSBs.

Arguments against privatization

In a paper titled “Privatisation of Public Sector Banks: An Alternate Perspective”, members of RBI’s Banking Research Division warn against the perspective of viewing privatization as a solution to all problems.

Following are the arguments given against the privatization of the banks in the report:

While the private banks dominate the metropolitan area it is the public sector banks that operate branches in rural India.

PSBs provide more ATMs in rural areas than PVBs.

PSBs are more efficient in bringing financial inclusions, and it can be seen through beneficiaries of the Jan Dhan Yojana.

PSBs are more efficient than PVBs in providing agricultural advances and PSL advances.

PSBs have a greater share in the lending for infrastructure finances, and this lending plays an important role in the country’s development and growth.

RBI researchers found that PSBs are also more effective in monetary policy transmission, aiding the countercyclical monetary policy actions to gain success.