Privatisation of Bank. Good or Bad?

It's been more than 50 years since the then Prime Minister and Finance Minister Mrs. Indira Gandhi nationalized the banks in 1969, the prime purpose was public welfare and to deliver social justice. Time has changed, now the current Modi Government is moving towards privatization of banks. The government is looking at PSBs as a strategic sector rather than an institution of social security.

But, Does the Government is assuring that their profit will increase under private ownership? Will depositor's money is safe under private management?

Nationalization V/S Privatization

 Let's look at some figures:

• By September 2020, the total number of branches reached 1,60,827 from a mere 8,187 in 1969.

• In rural areas, bank branches increased from 1443 in 1969 to 52,632 in September 2020.

• Total outstanding credit increased from Rs.3,987 crore in 1969 to Rs.1,07,04,649 crore in Jan 2021. Total deposits' has gone up to Rs.1,47,26,753 crore (75.5% of GDP) from Rs.3,035 crore.

Private Banks V/S PSBs

• Private Banks deposits, as of March 2020, amounted to Rs.40,40,424 crore(30.88%) against PSBs Rs.90,43,443 crore(69.12%).

• Total outstanding credit stands at Rs.37,07,435 crore(36.79%) against PSBs Rs.63,71,042 crore(63.21%).

• PSBs have huge coverage than private banks in rural areas. PSBs have 44,397 and private banks have 8,235 rural branches(84.35% to 15.65%).

• Private Banks are lacking behind in the deployment of ATMs in rural areas as only 6,112(18.34%) are private bank's ATMs in comparison to PSB's 33,312 ATMs.

• PSBs operate 97.2 % of 4198 crore Jan-Dhan accounts in the country.

• From Economic Surveys 2020-21, NPAs of private banks up to Rs.2,05,848 crore against Rs.6,87,317 crore in PSBs.

Rationale behind Privatisation

NPAs:- 

The overburdening of Bad loans on the banks has been a stressed factor for the economy for the last few years. The majority of these NPAs lie in Public Sector Banks.

Dual Control and lack of autonomy:-

PSBs are controlled by RBI and the Ministry of Finance. RBI does not have all the power as it has in private banks like licensing, mergers.

Autonomy has been a key issue for PSBs as most of its board members are not that professional which creates politicization of decision making and interference in day-to-day functioning.

Incentives:-

Private banks are profit-driven while several social schemes create disruptions of PSBs like the Farm loan waiver Scheme.

Also, the shareholder's control over private banks makes them less prone to big frauds like PNB fraud.

Issue with Privatisation

Issue of governance:-

There is control of the government in the case of PSBs which protect the banks. Private banks can do malpractices in wake of serving the interest of their promoters.

The plight of YES bank is the latest example.

PSBs as a tool of social justice:-

PSBs have been more supportive in farming sectors than private banks. Several service schemes execute through them. 

Issues with regulation:-

RBI will remain in the realm of just a regulatory body. It may reduce the power of RBI in controlling these banks.

A way Forward

Most of the losses are caused by corporate defaults. The quantum of bad loans written off from 2001 to 2019 is whooping Rs.6,94,037 crore. The written-off sum of 50 corporates aggregates to Rs.68,607 crore. The idea of transferring the control of banks to them makes no sense at all.

Improving governance by implementing the P J Nayak committee could be a better option. Using privatization as a tool to put off the burden from its shoulders can never have long-term benefits. It looks like a method to lay off your responsibility and accountability towards your people.

Establishing Bad banks and speedy resolution through the Insolvency and Bankruptcy Code can have the potential to improve NPAs. It is the government's right and duty to improve the functioning of sectors that are distressful, but giving away of controls just because banks are demanding more capital injection seems to have no path.

Every public service demands investments and government backing. 

What is next? RAILWAY, or, GOVERNMENT SCHOOLS and COLLEGES, or, HIGHWAYS.

And what if privatization fails? again Nationalization.