QUES . Privatization of public sector banks is fraught with huge risk”. Elucidate. UPSC IES/ISS EXAM 2021 General Studies. 200 Words. 5 Marks.
HINTS:
The privatization of public sector banks refers to the process of transferring ownership and control of government-owned banks to private entities. While privatization has been touted as a way to improve efficiency and profitability, it is also fraught with significant risks.
Arguments in Favour of Privatization of Banks
First, private banks have emerged as a credible alternative to public sector banks (PSBs) with substantial market share. PSBs have lost ground to private banks, both in terms of deposits and advances of loans. Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI.
Second, Government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.
At present PSBs are under the dual control of the RBI and the Department of Financial Services of the Ministry of Finance. The RBI handles the governance side of the PSBs under the RBI Act, 1934. The Department of Financial Services 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. Privatization will provide the powers to RBI to control them effectively.
Third, barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade. These PSBs have attained lower returns on assets and equity than their private sector counterparts. The non-performing assets (NPA) of PSBs remain elevated as compared to private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.
The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds infused in such banks as of May 31, 2022.
Fourth, the under-performance of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance during this period. These initiatives include:
(a) Recapitalisation of PSUs; (b) Constitution of the Bank Board Bureau to streamline and professionalize hiring and governance practices; (c) Prompt corrective action plans; (d) Consolidation through mergers.
Fifth, the steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in the ability of PSBs to meaningfully improve their performance.
Sixth, the current fiscal position of the Union Government is not strong enough to provide huge sums for recapitalization and keep on sustaining sick PSBs.
Seventh, the privatization of banks will have a positive impact on the economy by bringing stability at the macroeconomic level.
Privatization of a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs.
Challenges in Privatization of Banks
First, as per the stated policy of the Reserve Bank of India, banks cannot be run by industrial houses. However, excluding the industrial houses, there are no entities that have the required financial capability to take over any of the government banks.
Second, private banks have a long history of failures, as noted above (>1500 banks failed between 1935-1969). Recently, the RBI had to come to the rescue of Lakshmi Vilas Bank and YES Bank by pumping of capital by other entities to save these banks. Bank failures and lack of Government intervention will increase the risk in the banking system.
Third, banks owned by the sovereign government provide more comfort level to depositors. Expansion of private sector in banking will reduce consumer confidence in the sector.
Fourth, Private banks operate with the sole aim of adding shareholder value. In contrast, the government banks also try to serve society and ensure implementation of all government programmes for the social sector. Privatization might have a negative impact on financial inclusion, agriculture credit etc.
Fifth, bank workers are opposed to privatization, as they fear loss of jobs.
Sixth, privatization could result in a lack of access to banking services for certain sections of society. Private banks tend to focus on profitable segments of the market, such as high-income individuals and large corporations. This could leave low-income individuals and small businesses without access to banking services, which could have a negative impact on their ability to participate in the economy.
Conclusion
While privatization of public sector banks may have some potential benefits, it is also fraught with significant risks. Before embarking on this path, it is essential to carefully consider the potential implications and ensure that steps are taken to mitigate the risks and protect the public interest.
Privatizing all the PSBs and complete exit of the Government might have significant negative consequences. The Government must find ways to strengthen the governance of banking system and ensure safety of depositors’ money. Complete exit may not be an option, for now.
