The Union Budget 2021 revealed a critical decision of the government to privatize two public sector banks and one general insurance company in fiscal year 2021-22. Marking 51 years since the nationalisation in 1969, this move advocates the key involvement of the private sector in the banking industry. Currently, India operates with 22 private banks and 10 small finance banks.
A Glimpse into the Past
In 1969, the government chose to nationalise the 14 largest private banks which was an endeavour to align banking with the socialistic perspective of the then government. Prior to this, State Bank of India (SBI) was nationalized in 1955, followed by the insurance sector in 1956. There have been fluctuating stances regarding the privatisation of Public Sector Undertaking (PSU) banks over the past two decades. Although the notion of privatisation was propounded in 2015, it was not favoured by the Reserve Bank of India’s Governor at that time. However, the current stride towards privatisation, including the establishment of an Asset Reconstruction Company (Bad Bank), signifies an approachology of identifying market-led solutions to issues in the financial sector.
The Rationale Behind Privatisation
A significant reason for privatising is the declining financial status of public sector banks. Despite capital injections and governance reforms over the years, the financial health of these banks has not improved considerably. They bear a higher burden of stressed assets compared to private banks. Additionally, they lag behind in aspects of profitability, market capitalization, and dividend payment history.
Privatisation as a Long-Term Project: Effects and Implications
The privatisation of two public sector banks will set the foundation for an extensive project intending to maintain only a limited number of state-owned banks. The remaining banks will either be amalgamated with robust banks or privatised. This plan will relieve the government of its obligation to provide equity support annually. Consequently, the government now supervises 12 state-owned banks, down from 28 previously.
Recommendations from Various Committees
Numerous committees have proposed decreasing the government’s stake in public banks below 51%. For instance, The Narasimham Committee recommended 33%, and the P J Nayak Committee suggested less than 50%. A recent RBI Working Group advised allowing business houses to enter the banking sector.
Selection of Banks for Privatisation
The banks chosen for privatisation will be determined by a procedure that includes recommendations from NITI Aayog, deliberation by a core group of secretaries on divestment and then the Alternative Mechanism (or Group of Ministers).
Challenges Faced by PSU Banks
Public sector banks, despite mergers and equity injections by the government, continue to have high Non-Performing Assets (NPAs) and stressed assets. The impact of Covid has intensified these challenges, with banks expected to report higher NPAs and loan losses once the regulatory relaxations related to Covid are withdrawn.
Performance of Private Banks: An Upward Trend
The market share of private banks for loans escalated to 36% in 2020 from 21.26% in 2015. They ventured into new territories with innovative products, technological advancement, improved services, increasing their allure in stock markets.
Governance Issues and Challenges with Private Banks
Despite promising performances, private banks have also had governance issues, with CEOs of ICICI Bank and Yes Bank facing probes. Entities like Lakshmi Vilas Bank faced operational challenges and were subsequently merged with other banks.
The Road Ahead: Suggestions for Improvements
To enhance the governance and management of PSBs, it is essential to implement suggestions like those made by the PJ Nayak committee. Blind privatisation may not be the solution. A more feasible option could be transforming PSBs into corporations like Life Insurance Corporation (LIC), which maintains government ownership while granting more autonomy to PSBs.
