Introduction
In the Union Budget 2021-22, the Indian government announced plans to privatise two Public Sector Banks. This decision has generated extensive discourse on the significance, implications, and rationale behind this move. In this article, we will explore key concepts related to this development, including the difference between public and private sector banks, non-performing assets, recapitalisation and financial inclusion.
Understanding Privatisation and Its Significance
Privatisation refers to the transfer of ownership, property or business from government to private entities. An approach largely aimed at injecting efficiency and objectivity, privatisation was first adopted by India during the historic reforms budget of 1991, otherwise known as ‘New Economic Policy or LPG policy’.
Public Sector vs Private Sector Banks
Public Sector Banks (PSBs) are banks where the government holds more than a 50% stake with regulatory control over financial guidelines. They often enjoy a large customer base due to prevailing belief of higher security for depositor’s money. The State Bank of India (SBI), in which the Indian government holds a 63% share, is one such example. On the other hand, Private Sector Banks are majorly owned by private individuals or companies. These banks also follow central bank guidelines, but have the authority to formulate independent financial strategies tailored to their customer needs.
The Need for Privatising Public Sector Banks
Several reasons justify the need to privatise PSBs. Non-Performing Assets (NPAs), loans that borrowers fail to pay back, often erode a bank’s profitability. Many PSBs struggle to maintain an adequate capital ratio, leading to situations where their functioning is restricted by RBI. Additionally, most rural branches run at a loss due to high overheads and the prevalence of the barter system in rural India. Bureaucratisation often hampers the smooth functioning of these banks, leading to delays and lack of initiation.
Impact on Government Finances
Currently, the government uses taxpayers’ money to recapitalise PSBs. Privatisation could ease this financial burden as PSBs may become more efficient and profitable under private ownership. This was reflected in the Union Budget 2021-22, where privatising two PSBs was announced.
Efficiency of Private Sector Banks
Private Sector Banks (PVBs) are often considered more efficient, productive, and less corrupt than PSBs. They have lower gross NPAs and contribute significantly towards extending loans and attracting depositors. They have created more branches and new jobs while public sector banks saw declines on both counts. Moreover, every rupee invested in new private sector banks fetches a market value of Rs 3.70, considerably higher than the 71 paise market value fetched from PSBs.
Financial Inclusion in India
The Pradhan Mantri Jan Dhan Yojana (PMJDY), endeavours to provide universal access to banking facilities with at least one basic banking account for every household. Despite the efficiency of PVBs, PSBs have proven more effective in financial inclusion, with PSBs providing to 36.2 crore beneficiaries compared to the PVBs’ 1.3 crores. While private banks dominate metropolitan areas, it is the PSBs that operate branches in rural India and provide more ATMs.
The Way Forward
Despite the push for privatisation, experts from RBI’s Banking Research Division warn against seeing privatisation as a blanket solution. They argue that a ‘big bang approach’ could lead to vulnerable populations losing their financial inclusion and access to banking facilities. Thus, it is advisable to aim for a mix of public and private banks that best serves the diverse needs of India’s economy.
