Privatization of Public Sector Banks

IN NEWS:

• Recently, RBI clarified that researchers at the central bank were of the view that instead of a big bang approach to public sector bank privatisation, a gradual approach as announced by the government would result in better outcomes.
• The central bank was reacting to reports based on the article ‘Privatisation of Public Sector Banks: An Alternate Perspective’ published in the August 2022 issue of RBI bulletin. It was viewed by some as RBI being opposed to privatisation of public sector banks.

ARGUMENTS FAVOURING THE PRIVATISATION OF PSBs:

• To tackle the issue of dual control:
  • At present PSBs are under the dual control of RBI and Dept. of Financial Services of Ministry of Finance.
  • The RBI handles the governance side of the PSBs under the RBI Act, 1934. On the other hand, the Dept of Financial Services under the Finance Ministry maintains the regulation of PSBs under the Banking Regulation Act, 1949.
  • Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. The privatization will provide the powers to RBI to control them effectively.
• For better human resource management:
  • Privatisation will help in introducing a high degree of professional management.
  • On account of huge human capital deficit, PSBs are seriously handicapped vis-à-vis their competitors in the market place.
  • This is due to their employee compensation package, skill sets, skewed age profile, restrictive deployment and inefficient performance management system.
• To check the degrading financial position of PSBs:
  • Years of capital injections and governance reforms have not been able to improve the financial position of public sector banks significantly.
  • Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalization and dividend payment record.
• To enable autonomous decision making:
  • Control and interference by the government prevents PSBs from staying competitive in the current environment.
  • High level of autonomy will facilitate faster decision making, paving way for innovation and expertise.
• To reduce politicization in the functioning of PSBs
  • Public sector bank boards are still not adequately professionalized. Further, the Bank Board Bureau is not fully functional. So the government still decides board appointments. This creates an issue of politicization and interference in the normal functioning of Banks.
• To implement recommendations of Committees:
  • Many committees had proposed bringing down the government stake in public banks below 51 %.( eg. The Narasimham Committee proposed 33%, the P J Nayak Committee suggested below 50 %.)
• To develop innovation and achieve expertise:
  • Private players will have will and capital to innovate new products avenues (new schemes, services, etc.) and make the industries to achieve expertise in their respective fields by offering quality service and guidance.
  • This will help in bringing cost effective services and higher customer satisfaction.
• For enhanced efficiency in debt coverage:
  • The assets quality and efficiency of debt coverage of private sector banks are better than that of public sector banks.
  • A comparative study for the period of 2015 to 2019 has found that in comparison to private sector banks, public sectors banks registered higher NPAs.
  • The study had selected top five banks (as per total assets) from private and public sector. It found that while average Non-performing Asset (NPAs) of all the selected private sectors banks was less than 5%, it was more than 5% for all the selected Public sectors banks.
• Creation of big banks:
  • One of the objectives of privatisation is also to create big banks to cater to the growing economy of India.
• PSBs are losing market share:
  • Private Banks are operating in creamy places, cherry picking customers and PSBs are left with the difficult markets in poorer districts.
  • Urban and semi-urban consumers have been shifting to private banks.

ARGUMENT AGAINST PRIVATISATION OF PSBs

• Undermine the social objectives of banking sector:
  • PSBs have a significant social objective, especially in a developing country like India.
  • They are primarily responsible for providing loans to the most vulnerable section of the Indian society, particularly those who belong to the rural areas.
  • PSBs are also responsible for managing more than 97 per cent of Jan Dhan accounts under the government.
  • A majority of Self-Help groups have been associated with public sector banks, thus enabling rural people to become self-sufficient.
  • Most importantly, PSBs have played a significant role in providing credit to the farmers. The farming sector provides the majority of income to the Indian economy.
  • Sudden privatization might become a cause of panic and distrust amongst the most vulnerable sections of society.
• Financial exclusion of the weaker sections:
  • Driven by the profit motive, private sector banks concentrate on the more affluent sections of the population and the metropolitan/urban areas.
  • Privatisation of PSBs will therefore lead to the financial exclusion of the weaker sections of the society, particularly in the rural areas.
  • Merger of PSBs has resulted in decline in PSBs branches by 3,321 between 2017 and 2021. PSB privatisation would accelerate these trends.
• Rewarding crony capitalism:
  • The privatisation of the PSBs is tantamount to selling the banks to private corporates, many of whom have defaulted on loans from the PSBs, and will only reward crony capitalism.
• Employment related:
  • Job loss:
    • PSB mergers have brought down the number of PSBs from 27 to 12, resulting in employee retrenchment and bank branch closures.
    • Total employee strength of PSBs has fallen from 8.57 lakh in 2017 to around 7.7 lakh in 2021.
    • The privatisation will further shrink employment opportunities for the youth.
  • Fails to accommodate weaker sections
    • The SC/ST/OBC sections would be deprived because unlike the public sector, the private sector does not follow reservation policies for the weaker sections.
• Private banks are not flawless:
  • It has already seen more than 500 private banks falling from 1947 to 1969. Moreover, the government banks have bailed out private banks in several instances.
  • A significant number of private banks and financial institutions have failed in recent times too. Recent instances of failure are Lakshmi Vilas Bank and YES Bank. But there is not even a single instance of bank failure in the case of PSBs.
  • Between 1969 to 2000, nearly 25 private banks merged with public banks, and the most recent example has been YES Bank.
  • We cannot ignore the fact that private banks might have loopholes in their governance.
  • For instance, the former Managing Director and Chief Executive Officer of ICICI Bank, was often charged with issuing dubious loans to her husband.
• Concerns regarding safety of deposits:
  • Privatisation of PSBs will remove the sovereign guarantee behind the PSB deposits and make household savings less secure.
  • It is to be noted that PSBs account for 65% of all commercial bank deposits and 70% of all individual bank deposits in India. It shows that Indian customers preferred the safety and security of their deposits offered by the PSBs.
• Privatisation is not a panacea to problems faced by PSBs:
  • The major problem faced by banks i.e. NPAs is common for both the private and public sector banks.
  • As per Economic Survey 2020-21 NPAs are not exclusively generated in PSBs. The NPAs of private banks up to March 2020 amounted to Rs.2,05,848 crore against Rs. 6,87,317 crore in PSBs.

WAY FORWARD

• Proper implementation of the various committee recommendations:
  • Recommendation of PJ Nayak Committee:
    • Though the government approved the Bank Board Bureau, the government has to provide enough support for proper functioning.
    • The government can split the Chairman and Managing Director roles. Further, the state can allow them a fixed tenure of 3 to 5 years.
  • Recommendations of Narashimham committee:
    • The government can review the Banking Regulation Acts.
    • India can explore the concept of Narrow Banking. Under this weak PSBs will be allowed to place their funds only in the short term and risk-free assets. This will improve the performance of PSBs.
• Graded format towards privatisation:
  • Government may not fully exit from the state-run banks that are to be privatised and instead retain at least a 26% stake for the first few years.
• Identification of investors:
  • Identifying a fit and proper investor to own the stake in these banks will be important.
  • One of the options could be, the stakeholders of existing large banks may consider acquiring these PSBs, retain them as wholly owned subsidiaries with independent identity until they attain better operational efficiency. They can eventually merge with acquirer bank.
• Achieving the objective of big banks:
  • Privatized PSBs can be merged with existing large private banks, to attain the kind of scale and size to develop higher risk appetite and lending capacity.
• Strengthening bankruptcy law:
  • The government has to rectify the challenges in the Insolvency and Bankruptcy Code. This will provide a faster resolution process.

PRACTICE QUESTION:

Q. “Privatisation may make banks more efficient, but will compromise on social objectives”. Discuss.