Privatization of Public sector Banks (PSBs) in India

Published on - August 23, 2022

Source: PIB

Context:

Recently India had observed the 53rd anniversary of bank nationalisation where on the other hand in the Union Budget 2021-22, the government had announced its decision to privatise two public sector banks.

Background:

Over the past decade, India’s public sector banks have struggled with high levels of non-performing assets (NPAs).

NPAs are loans that the borrower fails to pay back to the bank. Predictably, high levels of NPAs erode a bank’s profitability.

In the case of many a PSBs, even that the RBI, which is the banking sector regulator, had to restrict the normal functioning of the banks and forced them to improve their financial performance metrics before being allowed to resume normal banking activities.

High levels of NPAs, and the ensuing actions, meant that PSBs struggled to finance India’s growth needs.

The government even had to recapitalise many PSBs to ensure that they stayed in the business.

What does Privatization of Banks mean?

The transfer of ownership, property or business from the government to the private sectoris termed privatization.

The government ceases to be the owner of the entity or business. The process in which a publicly-traded company is taken over by a few people is also called privatization.

Does India require Privatization of all PSBs?

According to a recent paper released, all PSBs should be privatised. But they also realise that this might be a tad too drastic for any government in India to do and they suggest privatising all except the State Bank of India.

Banking Laws (Amendment Bill 2021)

The Bill aims to amend banking company’s acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by the finance minister in the Union Budget 2021-22.

These laws had led to the nationalisation of banks, so relevant provisions of these laws have to be changed to pave the way for the privatisation.

This move will bring down the minimum government holding in the PSBs from 51% to 26%.

Pros and Cons of privatization of PSBs:

Pros:

Strengthening Banks: The government is trying to strengthen the strong banks and also minimise their numbers through privatisation to reduce its burden of support.

Creation of Big Banks: One of the objectives of privatisation is also to create big banks.

To reduce risks: Big size banks and Privatization can reduce risk associated with NPAs as Private sector has stringent norms for loans.

Cons:

Job Losses: The privatisation will also result in job losses, branch closures and financial exclusion.

Financial Exclusion of Weaker Sections: The private sector banks concentrate on the more affluent sections of the population and the urban areas, leading to financial exclusion of weaker sections of the society, particularly in the rural areas.

Governance Issues: Private sector banks run on mercy of several group of people and not by public consensus.

Public sector banks which got privatized:

The four banks that were placed in the initial list for privatisation were;

  • Bank of Maharashtra
  • Bank of India (Bank of India)
  • Indian Overseas Bank and
  • Central Bank of India