Privatisation of public sector banks

Context

Recently, RBI has warned that big-bang privatisation of public sector banks can do more harm than good.

Key-Findings

• While private sector banks (PVBs) are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion.
• PSBs (Public Sector Banks) have played a key role in catalysing financial investments in low-carbon industries, thereby promoting green transition in countries such as Brazil, China, Germany, Japan, and in the European Union.
• PSBs were not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks.
• The gradual approach to privatisation adopted by the government could ensure that a void was not created in fulfilling the social objective of financial inclusion and monetary transmission.
• Recent mega mergers of PSBs have resulted in consolidation of the sector, creating stronger and more robust and competitive banks.
• In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12.
• The establishment of the National Asset Reconstruction Company Limited (NARCL) would help in cleaning up the legacy burden of bad loans from their balance sheets.
• The recently constituted National Bank for Financing Infrastructure and Development (NABFiD) would provide an alternative channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs.

What is 'Privatisation'?

• The transfer of ownership, property or business from the government to the private sector is termed privatisation. 
• The government ceases to be the owner of the entity or business.
• It is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about. 
• India went for privatisation in the historic reforms budget of 1991, also known as 'New Economic Policy or LPG policy'.

Benefit of Privatisation

• Less effective bank mergers & infuse better management policies.
• No political interference & prompt decision-making.
• More employment opportunities in the sector for a large section of educated youth.
• More accountability to shareholders.
• Better use of technology by private banks.
• Improves inflow of Foreign Direct Investment (FDI) or investment.

Why is the government focusing on Privatisation?

• Minimising governance: Government wants to minimise its presence in different sectors where private industry is relatively more competent.
• This market-led approach is also reflected in the creation of Asset Reconstruction Company for solving the financial crunch.
• Profitability: Public banks lag on profitability, market capitalisation and dividend payment record.
• Stressed assets: The Non-Performing Assets (NPAs) and stressed assets have increased in number, especially amidst pandemic.
• The government is taking all the possible measures to ensure that the country doesn’t end up being in deficit financing mode and privatisation could be one of the best ways out.