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Approach:

  1. Introduction about the report.
  2. Pointwise mention their arguments in favour of bank privatisation.
  3. Mention their recommendations.
  4. Conclusion.

A report by National Council of Applied Economic Research (NCAER) has recommended that the Union Government should privatize all Public Sector Banks (PSBs), except the State Bank of India (SBI). The Report further states that the Government ownership hinders the ability of the RBI to regulate the sector. The recommendation of complete privatization of banks has led to sharp reactions from the critics.

Why privatisation of banks is preferred route (NCAER) ? :

  • Private banks have emerged as a credible alternative to PSBs with substantial market share. Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI.
  • Government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.
  • At present PSBs are under the dual control of the RBI and the Department of Financial Services (Ministry of Finance). The RBI handles the governance side of the PSBs under the RBI Act, 1934. The Department of Financial Services maintains the regulation of PSBs under the Banking Regulation Act, 1949.
  • Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. Privatization will provide the powers to RBI to control them effectively.
  • Barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade. These PSBs have attained lower returns on assets and equity than their private sector counterparts.
  • The non-performing assets (NPA) of PSBs remain elevated as compared to private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.
  • The under-performance of PSBs has persisted despite a number of policy initiatives, like Recapitalisation of PSUs, Constitution of the Bank Board Bureau to streamline and professionalize hiring and governance practices, Prompt corrective action plans, Consolidation through mergers.
  • Steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in their ability to meaningfully improve their performance.
  • The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds infused in such banks as of May 31, 2022.
  • The current fiscal position of the Union Government is not strong enough to provide huge recapitalization and keep on sustaining sick PSBs.
  • The privatization of banks will have a positive impact on the economy by bringing stability at the macroeconomic level.
  • Privatization of a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs.
  • The pandemic has led to the severe decline in the nation’s economic curve and has made a negative impact on banks as a whole, which makes it imperative to take all possible steps to revive the banking sector.

Recommendations: The two banks chosen for privatization must be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years. It has recommended Indian Bank and Bank of Baroda as the two top choices for privatization.

It also makes a case for corporate ownership in banks with due diligence for lack of potential large-scale investors in banks. The government must allow foreign investors, as well as corporate houses to enter the auctions. Any potential risk may be minimized by letting a consortium of corporations enter the bidding, with the stake of any single corporation capped.

Privatizing all the PSBs with complete exit of the Government may have significant negative consequences. The Government must find ways to strengthen the governance of banking system and ensure safety of depositors’ money. So, complete exit may not be an option for now.

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