CONTEXT 

• In the recent Budget session, the Union government announced its intent to privatise Public Sector Banks (PSBs), citing improving efficiency as the reason for this move.
• But there is no clarity, whether privatisation brings efficiency or reduces associated risks.

FALSE NOTIONS ATTACHED

• Failure of innumerable private banks around the world, challenges the notion that only private banks are efficient.
• Similarly, if private enterprises are the epitome of efficiency, why do private corporate entities have such large volumes of NPAs?

REVOLUTION THROUGH BANKS NATIONALISATION

• Bank nationalisation ushered in a revolution for India’s banking sector.
• Before nationalisation, barring the State Bank of India, most banks were privately owned and they largely benefited the rich and the powerful.
• The nationalisation of 14 private banks in 1969, followed by six more in 1980, transformed the banking sector, created jobs, extended credit to the agriculture sector and benefited the poor.
• Areas that had so far been neglected, including 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.

IMPLICATIONS OF BANK NATIONALISATION

• The move also helped in promoting more equitable regional growth which is evident from RBI data.
• It increased banking services and also reduced the dependence on moneylenders in rural regions. 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.

SIGNIFICANCE OF PSBs

• 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.
• They have played a huge role in making the country self-sufficient by supporting the green, blue, and dairy revolutions.
• Also, they have contributed significantly to infrastructural development of the country.

CONCERNS REGARDING PRIVATISATION OF BANKS

• Public sector banks in India are currently earning considerable operating profits. Therefore, placing such a huge network of bank branches and the infrastructure and assets in the hands of private enterprises may turn out to be an irrational move.
• 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.

PSBs CANNOT  BE BLAMED ALONE

• In the context of privatisation and efficiency, it is unfair to blame PSBs alone for the alarming rise of NPAs.
• Even, the government has not exhibited a firm willingness to implement the stringent measures to recover the losses.
• 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, stressing the balance sheets of PSBs.
• This has not only affected the profitability of the banks, but has also become an excuse to allege inefficiency.

WHAT CAN BE DONE?

• Stringent measures are required to recover large corporate stressed assets, which is a key concern for the entire banking sector.
• There is an urgent need to bring in a suitable statutory framework to consider wilful defaults on bank loans a “criminal offence”.
• Further, a system to examine top executives of PSBs across the country will also help in improving accountability.
• The government needs to strengthen PSBs, instead of starving them of the required capital and human resources through disinvestment and the proposed privatisation.

Privatisation of PSBs is not a definitive panacea for the problems of the banking sector in India. 

Reference:

1. https://www.thehindu.com/opinion/op-ed/looking-beyond-privatisation/article34095356.ece