The Indian government is in the process of taking ‘advanced action’ to expedite the privatisation of public sector banks. The government is ready to take further steps to control inflation and maintain economic stability and growth. As we delve into this topic, it is important to understand what privatization means. Simply put, Privatization is the transfer of ownership, property or business from the government to the private sector. It is considered to bring more efficiency and objectivity to the company, a quality that a government company may not necessarily prioritize. This concept was introduced in India in the historic reforms budget of 1991, also known as ‘New Economic Policy or LPG policy’.
The History
Nationalisation of banks has a long history in India. The government decided to nationalise the 14 largest private banks in 1969 to align the banking sector with the then socialistic approach of the government. State Bank of India (SBI) had been nationalised in 1955 itself, and insurance sector in 1956. The stance on privatisation has varied among different governments over the past two decades. In 2015, the government had suggested privatisation but the then Reserve Bank of India (RBI) Governor did not agree with the idea. The current moves towards privatisation, along with the establishment of an Asset Reconstruction Company (Bad Bank) fully owned by banks, underline a market-led approach to tackle challenges in the financial sector.
Reasons for Privatisation
The privatisation of banks can be attributed to several reasons. First, the Financial health of Public Sector Banks is deteriorating despite repeated attempts at capital injections and governance reforms. Privatisation is also seen as the first step in a long-term project that aims for only a few state-owned banks, reducing the number through consolidation or privatisation. This would relieve the government, the majority owner, of continuously providing equity support. Recommendations from various committees also point towards reducing government stake in public banks.
Potential Issues
While privatisation has its benefits, it also raises several concerns. Critics argue that privatising PSBs is akin to selling the banks to private corporates, including those who have defaulted on loans, thereby supporting crony capitalism. It could also lead to job losses, branch closures and financial exclusion, especially affecting Scheduled Castes, Scheduled Tribes, and Other Backward Classes (OBC) as the private sector does not follow reservation policies for these groups. Private sector banks usually concentrate on the affluent sections resulting in potential financial exclusion of weaker sections, particularly in rural areas.
The Way Forward
Improving the governance and management of PSBs is crucial. A possible solution was suggested by the PJ Nayak committee, which recommended a separation between government and top public sector appointments. Instead of uncontrolled privatisation, PSBs can be transformed into corporations like Life Insurance Corporation (LIC), maintaining government ownership while granting more autonomy to PSBs.
As the Indian government moves forward with its plans for privatisation of banks, it is important to remember the reasons behind this move, as well as the potential risks involved. It is certainly a multifaceted task that requires careful consideration of all angles and the exploration of new ideas but it can pave the way for developing a more sustainable and strong banking system benefitting all stakeholders.
