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OJAANK IAS ACADEMY

Privatisation of Public Sector Banks

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The government declared its plan to privatise two Public Sector Banks in the Union Budget 2021-22. Privatisation refers to the transfer of ownership, property, or company from the government to the private sector. The government no longer owns the company or firm. Privatization is thought to increase the firm’s efficiency and objectivity, something a government corporation is not concerned with.

In the historic reforms budget of 1991, often known as the ‘New Economic Policy or LPG policy,’ India went for privatisation. Public Sector Banks (PSBs) are those in which the government owns more than 50% of the company. Furthermore, the government monitors financial standards, and most depositors think that their money is safer in public sector banks due to government ownership. As a result, the majority of public sector banks have a sizable customer base.

The State Bank of India (SBI), for example, is India’s largest public sector bank. The Indian government owns more than 63% of this bank. Private sector banks are ones in which private people or private corporations possess a significant portion of the bank’s stock. Despite adhering to the standards of the country’s central bank, these banks are free to develop their own financial strategies for their consumers.

Non-performing assets (NPAs) are loans that borrowers fail to repay to the bank; excessive levels of NPAs impair a bank’s profitability. The majority of PSBs are likewise unable of maintaining a capital adequacy ratio. In the case of several PSBs, the RBI had to restrict their regular operations โ€” a process known as Prompt Corrective Action (or PCA) โ€” and push them to improve their financial performance criteria before allowing them to resume normal banking activity.

Because of expensive overheads and the presence of the barter system in much rural India, most rural branches are losing money. Banks’ seamless operation has been impeded by red tape, significant delays, a lack of initiative, and a reluctance to make rapid decisions. Instead of spending taxpayer funds to recapitalize PSBs, the government should just sell them to the private sector. This will lower the government’s financial burden while simultaneously guaranteeing that PSBs become more efficient and profitable under private management.

The government stated its intention to begin by privatising two PSBs in the Union Budget 2021-22. Private sector banks (PVBs) are significantly more efficient, productive, and less corrupt than public sector banks (PSBs). Gross NPAs in the private sector are lower. They provide a larger contribution to loan extension and a bigger percentage contribution to deposit collection from savers. More branches and more job opportunities. They opened more branches and hired more people, whereas public sector banks lost both. When the Economic Survey assessed bank nationalisation in 2020, it discovered that every rupee of public money invested in PSBs is worth just 71 paise in the market. This is referred to as the market to book ratio.

In striking contrast, every rupee invested in new private sector banks is worth Rs 3.70 in the market. In other words, private banks provide more than five times the value of public sector banks. The Pradhan Mantri Jan DhanYojana (PMJDY) programme aims to provide every family with at least one basic banking account. Public sector banks benefit 36.2 crore people, whereas private sector banks benefit just 1.3 crore people out of a total of over 46 crore people.

While commercial banks predominate in urban regions, public sector banks maintain branches in rural India. PSBs are supplying more ATMs in rural India. In terms of financial inclusion, PSBs outperform PVBs, however when profit maximisation is the only goal, PVBs outperform their public-sector counterparts.

When the goal function is altered to incorporate financial inclusion, such as total branches, agricultural advances, and PSL advances, PSBs outperform PVBs (middle and bottom panel). The importance of banking is determined by whether banks lend when borrowers need it the most. Thus, PSBs account for the lion’s share of infrastructure finance lendings, and their function has been especially important in light of the demise of former development financial institutions.

There is a need for a more nuanced approach, and members of the RBI’s Banking Research Division have advised against considering privatisation as a cure for all evils. The big bang strategy of privatising public sector banks may cause more harm than good, since the consequences may result in the vulnerable people losing financial inclusion and making it more difficult for them to access banking and associated services. That is why, rather than taking an ideological stance,it is preferable to focus on obtaining a balance of public and private banks that best suits the requirements of a diversified economy like India.


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