News Highlight
Big bang privatisation of public sector banks (PSBs) can do more harm than good, asking the government to take a nuanced approach on the issue.
Key Takeaway
- While private sector banks are more efficient in profit maximisation, PSBs have done better in promoting financial inclusion.
- A gradual privatisation strategy may ensure that the societal goal of monetary transmission and financial inclusion is not compromised.
Short History of Banks in India
- “The Bank of Hindostan”, established in 1770, was the first bank in India, which ran for about 60 years and soon failed.
- The modern-day “State Bank of India” was established in 1806 and was first named the “Bank of Calcutta”.
- It was later renamed the “Bank of Bengal” by the British Government.
- Soon this bank merged with “Bank of Madras” and “Bank of Bombay” and formed a new bank called “Imperial Bank of India”.
- The Reserve Bank of India (RBI) is the central banking institution in India. It was established on the 1st of April 1935 by the RBI Act of 1934.
- In succeeding years, India has gotten many other private banks to work well with the economy.
Privatisation of banks
- Privatisation of a bank is the term used to describe the transfer of ownership or company from the public to the private sector.
- While presenting the budget for 2021-22, the Finance Minister announced the plan to privatise two public sector banks.
Argument for supporting the privatisation of banks
- Make PSBs profitable:
- Most private banks are profitable to a large extent. Some PSUs are not making profits, and the government thinks that the privatisation of PSU banks may convert them from loss-making ventures to profitable self-sustainable businesses.
- Improve efficiency:
- It is found that private sector banks are more advanced than public sector banks.
- They are also known for their operational efficiency. One of the major motives private banks use to achieve this is profit.
- This makes them more competitive with superior service to gain customers. A private firm has pressure from shareholders to perform efficiently.
- Reduce banking fraud:
- Privatisation will also help to reduce the burden on the government of India.
- This is because private banks are stricter towards loans and fraud.
- It is startling to see Punjab National Bank (PNB) being defrauded of $1.8 billion by a few junior-level bank officials.
- Generally, frauds of such a scale do not occur in private banks.
- Attract foreign investment in banking:
- The foreign investors prefer to invest in private sector banks rather than public sector banks.
- Reduce political motive:
- Public banks are also constantly bullied for political motives.
- Privatisation will allow these banks to focus on their long-term goals with reduced government interference.
- For example, farm loan waivers during the election period.
Argument against the privatisation of banks
- Stay away from social commitments:
- The privatisation will adversely affect the poorer sections of society.
- This is because private banks will no longer function for the social benefit of the poor.
- It will also wipe out the public banks’ unique selling point (USP), which is trust in the government. This encourages depositors.
- It impacts financial inclusion:
- Public banks open branches, ATMs, banking facilities, etc., even in the non-profitable rural areas of India or the poorer areas where the possibility of getting big deposits or making money is less due to government or political demands.
- However, private banks are not inclined to do so, and they may prefer to open such facilities mostly in megacities or urban areas.
- Make unrest within banks:
- The privatisation is also unjust and will create added problems for employees who have strived to secure government jobs. Privatisation may also introduce variable income.
- This decision will most likely result in panic and protests across the country.
- Public trust:
- The people in present-day India mostly believe in public sector banks and don’t prefer depositing their savings in private sector banks.
- The success rate of government schemes:
- Many government schemes like “Jan-Dhan Yojna” (financial inclusion program) and “Pension Yojna” worked well and became successful only because they were applied in public sector banks.
Way forward
- Improving Governance:
- In order to improve the governance and management of PSBs, there is a need to implement the recommendations of the PJ Nayak committee.
- PJ Nayak Committee in 2014 also suggested that the government either merge or privatise state-owned banks.
- The corporatisation of PSBs:
- Rather than blind privatisation, PSBs can be made into a corporation like Life Insurance Corporation (LIC). While maintaining government ownership will give more autonomy to PSBs.
- Implement Kotak committee recommendation:
- Implement Kotak committee recommendation on corporate governance.
- It suggests improving standards concerning the corporate governance of listed companies in India.
Pic Courtesy: Telangana Today
Content Source: The Hindu