Why Banks Should Be Privatized
About privatization:
- The process of moving ownership, property, or enterprises from the public to the private sphere is known as privatisation. The government no longer owns the company or enterprise.
- Privatization is supposed to boost a company’s efficiency and objectivity in comparison to government-run enterprises.
- India chose privatisation in the historic 1991 reforms budget, also known as the “New Economic Policy” or “LPG policy.”
Why Does Privatization Have These Motives?
- Public Sector Banks’ Deteriorating Financial Situation: Public Sector Banks’ financial status has not significantly improved despite years of capital infusions and governance improvements.
- A few of them had bigger percentages of stressed assets than those latter institutions, in addition to lagging behind private banks in terms of profitability, market capitalization, and dividend payment history.
Components of long-term projects:
- The privatisation of two public sector banks will mark the beginning of a long-term plan that calls for only a small number of state-owned banks, with the remainder either being integrated with strong banks or being privatised.
- The initial government plan aimed for privatising four. Depending on how well the first two banks do, the government might sell off another two or three banks over the ensuing fiscal year.
- As the primary shareholder, this will relieve the government of its obligation to continue providing annual equity support to the banks.
- After a series of steps over the past few years, the government currently only controls 12 state-owned banks, down from 28 previously.
- Bank Strengthening: The government is striving to privatise weak banks and strengthen the strong ones in order to decrease the number of weak banks it must maintain.
- Various committees’ recommendations: A reduction of the government’s stake in public banks from 51 percent to 33 percent was suggested by the Narasimham Committee.
- Less than 50% was the P J Nayak Committee’s recommendation.
- Corporate organisations entering the banking market was a recent recommendation from an RBI Working Group.
- Giant Bank Creation: Another objective of privatisation is the establishment of big banks. In the end, merging with major private banks that already exist is the only way privatised PSBs can grow to the size and scale required to improve their risk appetite and lending capability.
- Therefore, privatisation is a difficult task that requires a multifaceted approach in order to address various challenges and consider novel concepts, but it may pave the way for the development of a more reliable and sustainable financial system that is advantageous to all stakeholders.
What issues are connected?
- Rewards of crony capitalism: Selling the PSBs to private firms, many of which have not repaid loans from the PSBs, will only benefit crony capitalism and will be a reward for it.
- Losses in Employment: The privatisation will also result in job losses, branch closures, and financial isolation.
- The amount of employment opportunities for Scheduled Castes, Scheduled Tribes, and Other Backward Classes may decline as a result of privatisation because the private sector does not follow quota restrictions for the less fortunate groups (OBC).
- Financial Exclusion of Weaker Groups: Private sector banks financially exclude society’s weaker groups, particularly those in rural areas, because they concentrate on more affluent populations and metropolitan/urban areas.
- Rural communities now have access to banking thanks to public sector banks.
- Bank unions have referred to the privatisation process as a “bailout operation” for corporate defaulters.
- Bad loans on a large scale are a product of the private sector. In actuality, they should be punished for this offence. However, the government is rewarding them by handing over control of the banks to the private sector.
Way Forward:
- It is necessary to enhance PSB management and governance. To achieve this, the PJ Nayak committee recommended removing the government from high-level public sector appointments (everything the Banks Board Bureau was supposed to do but could not).
- Instead of a blind privatisation, PSBs can be turned into a company like Life Insurance Corporation (LIC). By doing this, government control of PSBs will remain while also increasing their independence.
