The government of India has recently decided to re-examine certain key aspects of the Banking Laws (Amendment) Bill 2021 during the Winter session of Parliament. This bill aims to privatize two Public Sector Banks (PSBs) as part of the disinvestment goals outlined by the finance minister in Union Budget 2021-22. This decision is part of larger discussions about the state of banking in India, including debates about privatization and nationalization, and broader questions about the role of the Reserve Bank of India (RBI).
Understanding the Banking Laws (Amendment) Bill 2021
The Banking Laws (Amendment) Bill 2021 intends to alter banking companies’ acquisition and transfer laws from 1970 and 1980 and the Banking Regulation Act of 1949. These amendments will clear the way for privatizing two PSBs, a significant shift from the existing laws that led to bank nationalization. As a result, the minimum government holding in the PSBs will reduce from 51% to 26%.
Privatisation vs Nationalisation
Privatisation refers to the transfer of ownership, property, or businesses from the government to the private sector. This transition is believed to bring greater efficiency and objectivity to the company, attributes often lacking in government-operated firms.
On the other hand, nationalisation involves transferring privately-controlled companies, industries, or assets under the control of the government. The Indian government decided to nationalise the 14 largest private banks in 1969 to align the banking sector with the then prevailing socialistic approach.
Background of Banking in India
The State Bank of India (SBI) was nationalised in 1955, followed by the insurance sector in 1956. Over the last 20 years, different governments have debated the privatisation of Public Sector Undertaking (PSU) banks. In 2015, the government suggested privatisation, but the RBI Governor of that time did not support the idea.
Currently, the government, along with establishing an Asset Reconstruction Company (Bad Bank), is pushing for privatisation as a market-led solution to the challenges in the financial sector.
Reasons for Privatisation
The financial position of public sector banks has been continuously deteriorating despite capital injections and governance reforms. Their levels of stressed assets are higher compared to private banks, and they also lag behind in profitability, market capitalisation, and dividend payment records.
Privatisation is considered part of a long-term project that envisages only a few state-owned banks, with the rest either merged with strong banks or privatised. This would free up the government, the majority owner, from constantly providing equity support to these banks year after year.
Issues with Privatisation
Critics argue that privatisation would lead to rewarding crony capitalism, job losses, branch closures, and financial exclusion among other issues. They believe that privatisation will shrink employment opportunities for Scheduled Castes, Scheduled Tribes and Other Backward Classes (OBC), as the private sector does not follow reservation policies for the weaker sections.
Banking Regulation Act, 1949
The Banking Regulation Act, 1949, regulates banking firms in India and empowers the Reserve Bank of India (RBI) to issue licenses to commercial banks, regulate shareholders’ shareholding and voting rights, supervise the appointment of boards and management, regulate bank operations, and impose penalties on banks if required.
In 2020, the government passed an ordinance to amend the Banking Regulation Act, 1949, bringing all co-operatives under the supervision of the Reserve Bank to better protect the interests of depositors.
Moving Forward
There is an urgent need for a suitable statutory framework that treats wilful defaults on bank loans as a “criminal offence”. Furthermore, there is a necessity for adherence to prudential norms for lending and effective resolution of Non-Performing Assets. The governance and management of PSBs also need to improve. Recommendations suggest distancing between the government and top public sector appointments. Instead of outright privatisation, PSBs could transition into a corporation similar to Life Insurance Corporation (LIC), providing them with more autonomy while maintaining government ownership.