Opinion – Is Privatizing Indian PSBs the answer to its woes?

Of late, privatization is being touted as the panacea to the woes of the Indian Public Sector Banks (PSBs). Here, I argue that it isn’t so.

First let us begin by start looking at the predicaments of the PSBs:

  • High riding Non-Performing Assets (NPAs).
  • Corruption (the recent arrest of Managing Director of Syndicate Bank on charges of corruption is an example).
  • Dual regulation of PSBs by Finance Ministry and Reserve Bank of India (RBI).
  • Multiple external oversight like Central Vigilance Commission (CVC), Central Bureau of Investigation (CBI) etc.
  • Poor management of the boards due to lack of professionalism.
  • Lack of security of tenure of Chairman resulting in discontinuity of policies and decisions.

How Privatization of banks helps this?

  • Dual regulation of Finance Ministry and RBI will be replaced by the single regulation of RBI.
  • End the multiple external oversight of CVC, CBI etc.
  • PSBs can work to realize their “commercial” goals more than the “policy” goals of the government.
  • Improve the professionalism of the boards and their functioning.
  • Can pave way for security of tenure for the Chairman and Managing Director
  • The PSBs backed by the government suffer from acute shortage of capital formation. This can be addressed to a large extent with Privatization of the PSBs. This will make it easy for the Indian banking system comply to the Basel III Norms.

Why Privatization will not help?

  • The global economic crisis of 2008-2009, which was largely due to the collapse of private banks, illustrates the fact that so called “Professionalism” of private banks is not free from ills.
  • Also, it may not be fair to compare the financial soundness of public and private sector banks when the former is unduly stressed. Had such a comparison been made during 2008-09, then the situation would have been quite opposite.
  • If we look at why the PSBs suffer from high NPAs, it is largely due to the recent slowdown of the economy, which was greatly stimulated by the PSBs in the last 5 years. For example, infrastructure sector would have stagnated if not because of the lending of the PSBs.
  • Also PSBs work towards greater goals like promoting national economic growth besides their profit making motto. This is not a negative but a positive and desirable aspect for a developing country like India, where there are glaring differences in accessibility of banking services. On the other hand, privatizing the banks would have no such objectives.
  • In a developing country like India, where the financial inclusion is rather poor, privatization of banks will act antithetical to promote financial inclusion. This is evident from the poor presence of private banks in rural areas.
  • With no PSBs, the private banks can act as a powerful lobby to end or at least reduce the priority sector lending (PSL) rates which will starve the sectors like agriculture, education and MSMEs.
  • Today the PSBs enjoy significant public confidence due to which India’s banking sector is quite stable and resilient to rumors or financial shocks. If dominated by private banks, the banking sector will be highly vulnerable to such rumors and shocks. The example to this is again the 2008 global financial crisis.

Way Out: Harnessing the best of Public and Private sector banks is the key. In this regard, some of the recommendations of the Nayak committee provide great starting points to the reforms.

  • Ending the regulation by Finance Ministry starting with minimizing the political interference in the functioning of the PSBs. The Finance Minister Arun Jaitley’s comments in “Gyan Sangam” on minimizing the political interference in PSBs is a welcome step.
  • With the recovery of the economy, particularly the mining and manufacturing sectors, which had already started with a slew of “Modiian” reforms,  the NPAs of the PSBs are not only likely to go down, but its loan extensions to infrastructure sector will make this growth more pronounced and sustainable.
  • The recent government’s decision of separating the posts of Chairman and Managing Director would improve the accountability in governance of the PSBs.
  • [Nayak Committee] Establishment of BBB (Banks Board Bureau) in appointment of board members in a transparent manner and guarantee of tenure would improve the professionalism in the functioning of PSBs.
  • Transparent, independent and merit based appointments for higher banking posts like Chairman and Managing Director.
  • Granting greater autonomy in the functioning of PSBs.
  • Partial privatization with government retaining maximum share in PSBs will help in overcoming the problem of shortage of capital formation. This will help the Indian banking sector in complying to the Basel III norms easily.
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