HPAS/Allied Mains 2022 Answer Writing Challenge Day 193: Model Answer

Question: What are the advantages and disadvantages of privatisation of public sector banks in India? (8 marks/ 120 words)

Answer:

The transfer of ownership, property, or business from the government to the private sector is termed privatization. The government ceases to be the owner of the entity or business.

Advantages:

• Optimum Utilisation of Resources: It has been observed that the public sector has failed in the optimal use of national resources. The private sector may succeed in the optimum use of resources by maintaining efficiency.
• Financial Resources: The main advantage of privatization is to generate financial resources for the government.
• Fostering Competition: Most of the public enterprises enjoy the status of monopoly. It results in inefficiency and losses. Privatization creates a situation of competition for public enterprises and they are forced to improve their efficiency.
• Reduce Fiscal Burden: Privatization reduces the fiscal burden of the state by relieving it of the losses of the public enterprise and reducing the size of the bureaucracy.
• Reduction in Political Interferences: The process of privatization reduces political interferences in the public sector enterprises by giving more representation to the private sector in the management of Public Enterprises.

Disadvantages:

• The credibility of Private Sector Banks: The Private sector bank is not always efficient. On a global level, there are many private banks that have failed, thus challenging the idea of private banks are efficient. For example, the recent YES Bank problem in India.
• Reason for NPA’s: The present NPA problem lies majorly with the PSBs. But the NPA’s increased due to the credit provided to the private corporate entities. So, the private corporate entities have to be regulated and not the PSBs.
• Against inclusive banking:The Private Sector focussed on profit motive might restrict the credit to rural, agricultural, women, poor sections of society, etc. Thus, after Privatised PSBs the remaining PSBs have to take care of all of such credits. This might stress the remaining PSBs also.
• Governance and policy issue of RBI:Restructuring schemes such as strategic debt restructuring and schemes for sustainable structuring of stressed assets, initiated by RBI, are the major reasons for delayed recognition of bad loans from banks. This is applicable to all banks irrespective of ownership (public as well as private) of the banks.

Conclusion: It is important to realize that Privatisation is not the panacea for all ills as said by the Former RBI deputy governor SS Mundra.