Why in the news?

• The government in the budget announced that it will be privatising 2 public sector banks. 
• It also announced a strategic sale/disinvestment policy for four strategic sectors — including banking, insurance and financial services — in which the government will  have a “bare minimum presence”.
• Let us understand issues around the privatisation of banks.

No. of public sector and private sector banks in India

• India has 12 state-owned banks and 22 private banks and 10 small finance banks.

Issues with Public-sector banks

• Compared with private banks, Public sector banks have high non-performing assets (NPAs) and stressed assets.
• In the RBI’s recent Financial Stability Report, gross NPA ratio of all commercial banks may increase from 7.5% in September 2020 to 13.5% by September 2021 under the baseline scenario (from 9.7% to 16.2% for public sector banks; from 4.6% to 7.9% for private banks) due to COVID 19 pandemic.
• Government in the last 3 years has given 2.56 lakh crores to Public sector banks to keep them healthy but now due to pandemic the government wants to privatise them to shed their burden.
• The idea of government is to keep only 2 to 4 Public sector banks.

Are Private banks perfect in all hemispheres?

• The competition between private and public banks started in the 1990s when RBI allowed more private banks in India.
• Today Private banks’ market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%.
• They have expanded the market share through new products, technology, and better services, and also attracted better valuations in stock markets — HDFC Bank (set up in 1994) has a market capitalisation of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore. 
• But there are many issues persisting within the private banks, especially on governance issues. For Example:

1. ICICI Bank MD and CEO Chanda Kochhar was sacked for allegedly extending dubious loans. 
2. Yes Bank CEO Rana Kapoor was not given extension by the RBI and now faces investigations by various agencies. 
3. Lakshmi Vilas Bank faced operational issues and was recently merged with DBS Bank of Singapore. 
4. RBI has found under reporting of NPAs among private banks.

• With these in mind, the government should take proper precautions before the privatisation of banks.

How will be privatisation of Public sector banks done?

• The two banks which are to be  privatised, will be selected through a process in which NITI Aayog will make recommendations, which will be considered by a core group of secretaries on disinvestment and then the Alternative Mechanism (or Group of Ministers).

References:

1. https://financialservices.gov.in/banking-divisions/public-sector-banks
2. https://indianexpress.com/article/explained/privatisation-of-public-sector-banks-union-budget-npas-psu-7183446/