Privatisation of banking sector: Issues and analysis

Source: The Indian Express

Syllabus: GS -3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Synopsis: The government has decided to privatise two public sector banks. The move will give the private sector a key role in the banking sector.

Introduction 

The government has announced the disinvestment policies for four strategic sectors including banking, insurance, and financial services. The government will have a bare minimum presence in these sectors.

• Earlier, the government merged ten PSU banks into four.
• The government is now left with 12 state-owned banks, from 28 earlier.
• The government will select 2 banks for privatization, based on the NITI Aayog’s recommendations. These recommendations will be considered by a core group of secretaries on disinvestment. 

What were the reasons for the nationalization of Private banks?

In the Mid-1960s, the commercial banking sector was most profitable, especially after the consolidation of 566 banks in 1951 to 91 in 1967. However, some issues were present in this sectors at that time:

• Branches were mostly opened in the urban areas. Rural and semi-urban areas were not served by commercial banking.
• Banks were not willing to take any social responsibilities. They were more concerned with the profits and afraid to diversify their loan portfolios.
• Nationalisation was done with an intention to align the banking sector with a socialistic approach of the government.

Thus, from 1969, the process of nationalization of the 14 largest private banks started.

Why government is privatizing the PSBs?

However, at present, PSBs are suffering from many issues:

• First, Public Sector Banks continue to have high Non-Performing Assets and stressed assets as compared to private banks.
• Second, banks are expected to report higher NPAs and loan losses after the Covid-related regulatory relaxations are lifted. As a result, the government would need to inject funds into weak public sector banks. 
• Third, Governance reforms have not been able to improve the financial position of public sector banks. 

The profitability, market capitalization, and dividend payment record of PSBs are not improving, despite efforts of reform by the government.

How are the private banks performing currently?

• Private banks’ market share in loans has risen to 36% in 2020, while public sector banks’ share has fallen to 59.8% in 2020 (from 74.28% in 2015). 
• They are expanding their market share through new products, technology, and better services. They have attracted better valuations in stock markets. 
  • For example, HDFC Bank has a market capitalization of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore.
• However, everything is not well within private sector banking as well. CEOs of ICICI and Yes bank are facing the investigation for doubtful loans and other illegal activities. Lakshmi Vilas Bank merged with DBS Bank of Singapore after operational issues.
• Moreover, an Asset quality review of banks in 2015, found that many private sector banks were under-reporting NPAs.

Thus, the privatization drive this time should be thoughtful. Lessons should be learnt from the past. An adequate mechanism to ensure accountability must be established in the commercial banking sector.