Essay On Bank Privatisation Pros And Cons

Public sector banks have been providing banking services in the remotest part of the country with numerous welfare schemes and benefits for their customers focusing on priority sector lending and providing aid through welfare schemes to the marginalized sectors. The rise of NPAs has been a pressing concern for the government. 

According to the recommendations of the PJ Nayak Committee, lower productivity, steep erosion in asset quality, accelerated stressed assets, decline the market share and the recapitalization of these banks will impose significant fiscal costs. 

In order to maintain steady growth and sound health of the banking sector, the government had to either privatize PSBs or provide a structure that provides for PSBs to complete successfully in the market. 

The private banks will have limited applicability of RTI and will bring it outside the scope of CVC and CBI which tends to be a negative impact on depositors. Assuming private banks will take over the existing branches of the PSBs in the rural areas.

It will still pose great difficulty in terms of governance and maintenance. Since the end result of private banks is to make a profit, the concept of a welfare state as adhered to by the PSBs may suffer. PSBs are backed by the sovereign so it has a chance of recovery due to the support of the government which is not in the case of private banks. 

Privatization of PSBs will not end the NPA problem, but will surely aid in effectively bringing it down. Administrative efficiency and customer service will improve.

There will be increased competition in the market which will eventually drive private banks to perform better and increase their efficiency. And the influx of FDI in the banking sector will boost the economy and will create more job opportunities for individuals. 

PSBs have been the backbone of the economy. Privatization is a gamble whose outcomes are unknown in the distant future. 

Change in management and control, increased supervision, upward communication and strict adherence to rules and regulations can turn around the banking sector. 

Pros & Cons of Privatization of Public Sector Banks in India 

What's happening? 

The banking landscape in india is set to change with the government's decision to privatise two public sector banks. 

Coming after 51 years of nationalisation of government-owned banks in 1969, the move will give the private sector a key role in the banking sector. 

Why the proposal?

The union budget has announced the privatisation of two public sector banks (in addition to idbi bank) and one general insurance company in the upcoming fiscal.

It also announced a strategic sale/disinvestment policy for four strategic sectors – including banking, insurance and financial services – in which it will have a “bare minimum presence”. 

Years of capital injections and governance reforms have not been able to improve the financial position of in public sector banks significantly. 

Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalisation and dividend payment record.

The government front-loaded rs 70,000 crore into government-run banks in september 2019, rs 80,000 crore in in fy18, and rs 1.06 lakh crore in fy19 through recapitalisation bonds.

In 2019, the government merged ten psu banks into four. Privatisation of two public sector banks will set the ball rolling for a long-term project that envisages only a handful of state-owned banks, with the rest either consolidated with strong banks or privatised. 

This will free up the government, the majority owner, from continuing to provide equity support to the banks year after year.

How the 2 banks will be selected? 

The two banks that will now be privatised will be selected through a process in which niti aayog will make recommendations, which will be considered by a core group of secretaries on disinvestment and then the alternative mechanism (or group of ministers). 

What are the issues plaguing PSU Banks? 

After a series of mergers and equity injections by the government, the performance of public sector banks has shown improvement over the last couple of years. 

However, compared with private banks, they continue to have high non-performing assets (npas) and stressed assets although this has started declining. After the covid-related regulatory relaxations are lifted, banks are expected to report higher npas and loan losses. 

As per the rbi's recent financial stability report, gross npa ratio of all commercial banks may increase from 7.5% in september 2020 to 13.5% by september 2021. This would mean the government would again need to inject equity into weak public sector banks. The government is trying to strengthen the strong banks and also minimise their numbers through privatization to reduce its burden of support. 

Are private banks doing better?

Private banks' market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks' share has fallen to 59.8% from 74.28%. Competition heated up after the rbi allowed more private banks since the 1990s.

They have expanded the market share through new products, technology, and better services, and also attracted better valuations in stock markets - hdfc bank (set up in 1994) has a market capitalisation of rs 8.80 lakh crore while sbi commands just rs 3.50 lakh crore. India has 22 private banks and 10 small finance banks. 

Concerns regarding private banks 

In the last couple of years, some questions have arisen over the performance of private banks, especially on governance issues. Icici bank md and ceo chanda kochhar was sacked for allegedly extending dubious loans. Lakshmi vilas bank faced operational issues and was recently merged with dbs bank of singapore.

Moreover, when the rbi ordered an asset quality review of banks in 2015, many private sector banks, including yes bank, were found under-reporting npas. Former axis bank md shikha sharma too was denied an extension. 

Government and RBI stand on privatisation? 

Many committees had proposed bringing down the government stake in public banks below 51% – the narasimham committee proposed 33% and the pj nayak committee suggested below 50%. The upa government of 2004-14 refrained from taking any decision on privatisation. The nda government, in its second term, has been pushing for privatisation and reducing the number of psu banks to five or six. 

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