Privatisation of banks

Syllabus: General Studies Paper 3

Context:

 It has been reported that the government continues to work on its stated position that most of the public sector banks will be eventually privatised.

• Banking will be one of the sectors where a bare minimum of the public sector will remain. This is the government’s stated policy.
• Earlier the government announced a Public Enterprise Policy, where it identified areas where public sector presence will be there. 
  • Under the New Policy: Strategic: Atomic energy, space, defence, trans and telecom, power, petro, coal, other minerals, banking, insurance and financial services will be classified as strategic sectors.

Case for privatising banks

• Non-performing assets: The major problem faced by banks is on account of non-performing assets, which is common for both the private and public sector banks.
• Capital Adequacy ratio: The government also has difficulty in providing additional capital to the government banks on account of fiscal constraint.
  • The banks are in need of additional capital to maintain Capital Adequacy Ratio for continuing their lending operations. 
  • Capital Adequacy Ratio (CAR) is the ratio of a bank’s capital to its risk.
  • It is decided by central banks and bank regulators to prevent commercial banks from taking excess leverage and becoming insolvent in the process.
  • The Basel III norms stipulated a capital to risk-weighted assets of 8%.
  • In India, scheduled commercial banks are required to maintain a CAR of 9% while Indian public sector banks are emphasized to maintain a CAR of 12% as per RBI norms.

Concerns with privatisation of banks:

• Equitable growth: As an institution, PSBs are vehicles of the Indian economy’s growth and development, and they have become the trustees of people’s savings and confidence. 
  • The PSBs played a huge role in making the country self-sufficient by supporting the green, blue, and dairy revolutions. 
  • They have also contributed significantly to infrastructural development.
• Financial Inclusion:: The nationalisation of private banks in 1969 resulted in the opening of tens of thousands of branches in remote corners of the country. 
  • Forty-two crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening the Prime Minister Jan Dhan Yojana account.
• Employment generation by PSBs: Banks were used to bring about a revolution in agriculture and to carry out activities related to it. 
• Generated employment: Nationalised banking improved the working conditions of employees in the banking sector, as the state ensured higher wages, security of services, and other fringe benefits.
• Neglected areas prioritized: Neglected areas like agriculture, employment-generating productive activities, poverty alleviation plans, rural development, health, education, exports, infrastructure, women’s empowerment, small scale and medium industry, and small and micro industries, became priority sectors for these banks.
  • Bank loans were available to the weaker sections and small entrepreneurs.
• Market risks: While improving efficiency has been cited as the reason for privatisation of banks, it is not clear whether privatisation brings efficiency or reduces associated risks.
  • Around the world, innumerable private banks have failed, thus challenging the notion that only private banks are efficient.
  • Already we have a substantial presence of new generation private sector banks which are giving enough competition to the government banks.
• Monopolisation: It could lead to denial of convenient and economical banking services to the common man; the risks of monopoly and cartelisation may only complicate the issue.
• Large NPAs: Private corporate entities have large volumes of NPAs.
• Comfort level: Banks owned by the sovereign government provides tremendous comfort level to depositors. In his subconscious mind the common man feels that a government bank cannot fail and his money is safe.
• Wilful default by large corporate borrowers and subsequent recovery haircuts, imposed through the ill-conceived Insolvency and Bankruptcy Code, has resulted in a heap of write-offs.
  • This has not only affected the profitability of the banks, but has also become an excuse to allege inefficiency.
• Risks of failure: Banks operate with a small portion of shareholders’ funds with a disproportionately higher outlay of common man’s deposit. Banks basically lend depositors’ money.
  • Any failure of banks will have a tremendous contagion effect and will derail the economy. 
  • We should keep in mind the historical factors that had led to bank nationalisation in 1969.
  • After the formation of Reserve Bank of India in 1935, up to the period of our getting Independence (1947) there were 900 bank failures in our country. From 1947 to 1969, 665 banks failed.
  • The depositors of all these banks lost their deposited money. Even after 1969, 36 banks failed but these were rescued by merging them with other government banks.
  • Recently, we have seen the failure of old generation Lakshmi Vilas Bank and new generation YES Bank.
  • The 1,926 town cooperative banks in 2004 have shrunk to 1,551 in 2018, as per an RBI report. 
• Profit motive: Private Banks often operates for profit only. But state-owned banks, while trying to be profitable on the one hand, provide many services in public interest. Only government banks provide services to the common people at affordable cost.

Way forward

• Recovery measures: On the contrary, stringent measures are required to recover large corporate stressed assets, which is a key concern for the entire banking sector. 
  • This must include strong recovery laws and taking criminal action against wilful defaulters. 
• Curbing wilful defaults: There is an urgent and imperative need to bring in a suitable statutory framework to consider wilful defaults on bank loans a “criminal offence”. 
• A system to examine top executives of PSBs across the country will also help in improving accountability.

The Hindu Link:

https://www.thehindubusinessline.com/opinion/govt-owned-banks-not-only-provide-tremendous-comfort-level-to-depositors-but-also-render-services-at-affordable-cost/article36416057.ece

Question- Privatisation of banks might further deteriorate the stressed assets scenario in the current banking sector. Comment.