Why in the news?
- The government is taking “advanced action” to speed up the privatisation of public sector banks.
- The administration is preparing to take additional efforts to reduce inflation while maintaining economic stability and growth.
What exactly is privatisation?
- Privatisation refers to the transfer of ownership, property, or company from the government to the private sector. The government no longer owns the company or firm.
- Privatization is thought to increase the company’s efficiency and objectivity, something a government company is not concerned with.
- In the historic reforms budget of 1991, often known as the ‘New Economic Policy or LPG policy,’ India went for privatisation.
What is the context?
- In 1969, the government intended to nationalise the 14 largest private banks. The plan was to connect the banking industry with the then-socialist government’s approach.
- The State Bank of India (SBI) was nationalised in 1955, and the insurance industry in 1956.
- Various administrations have supported and opposed privatisation of Public Sector Undertaking (PSU) banks during the previous 20 years. The government proposed privatisation in 2015, but the then-Governor of the Reserve Bank of India (RBI) was opposed.
- The present privatisation processes, as well as the establishment of an Asset Reconstruction Company (Bad Bank) completely owned by banks, highlight an approach to finding market-led solutions to financial sector difficulties.
- The Centre declared in the Budget for 2021-22 the privatisation of two public sector banks, but has yet to alter the appropriate banking regulations to allow the sale of its majority holding in them.
What Are the Justifications for Privatization?
- Public Sector Banks’ Financial Position is deteriorating:
- Years of capital injections and governance changes have failed to appreciably improve the financial position of public sector banks.
- Many of them have more stressed assets than private banks and fall behind them in terms of profitability, market capitalization, and dividend payment history.
Part of a Long-Term Initiative:
- The privatisation of two public sector banks will kick off a long-term project that envisions only a handful of state-owned banks, with the remainder combined with strong banks or privatised.
- The government’s initial aim was to privatise four. Depending on the success of the first two, the government may divest in another two or three banks in the coming fiscal year.
- This will relieve the government, as the majority owner, of the obligation to continue providing equity support to the banks year after year.
- After a series of steps over the last few years, the government currently has 12 state-owned banks, down from 28 previously.
To decrease its support burden, the government is attempting to strengthen strong banks while also reducing their number through privatisation.
Recommendations from several committees:
Many committees had advocated reducing the government’s interest in public banks to less than 51 percent:
- The Narasimham Committee suggested a 33% tax.
- The P J Nayak Committee recommended a percentage of less than 50%.
- An RBI Working Group has recommended that business houses enter the banking market.
Creation of Large Banks:
- One of the goals of privatisation is to build large banks. Unless privatised PSBs merge with existing large private banks, they will not be able to achieve the scale and size required to generate a higher risk appetite and lending capability.
- As a result, privatisation is a complicated process that must be approached from all perspectives in order to address different difficulties and explore new ideas, but it can lead the way for the development of a more sustainable and powerful banking system that benefits all stakeholders.
What are the Concurrent Issues?
- Crony Capitalism Will Be Rewarded: Privatizing the PSBs is the same as selling the banks to private corporates, many of whom have failed on PSB loans, and will only reward crony capitalism.
Job losses, branch closures, and financial isolation will all arise from privatisation.
- Because the private sector does not respect quota regulations for the weaker parts, privatisation will reduce employment prospects for Scheduled Castes, Scheduled Tribes, and Other Backward Classes (OBC).
- Financial Exclusion of Weaker Sections: Private sector banks focus on the more affluent segments of the population and metropolitan/urban areas, resulting in financial exclusion of the society’s weaker segments, notably in rural areas.
- Banks in the public sector were bringing banking to rural areas and achieving financial inclusion.
- Bank unions have referred to the privatisation process as a “bailout operation” for corporate defaulters.
- The private sector is to blame for the massive bad loans. They should, in fact, be penalised for this crime. However, the government is rewarding them by transferring the banks to the private sector.
The Way Forward
- PSB governance and management must be improved. The PJ Nayak committee advocated separating the government from top public sector appointments as a strategy to accomplish this (everything the Banks Board Bureau was supposed to do but could not).
- Rather of just privatising, PSBs can be transformed into corporations such as Life Insurance Corporation (LIC). PSBs will have more autonomy while still being owned by the government.