Bank Privatisation - Explained

Bank Privatisation

Do you think the privatisation of public sector banks is relevant for this period of an economy with the highest contraction in the economy, rising unemployment, falling disposable income, rising fiscal deficit?

Privatisation of Banks explained

The government cited as Improving efficiency, deterioration of balance sheet, balloning of NPAs are as the reason for Privatisation.  Many committees including Narasimhan and PJ Nayak committee had proposed bringing down the government stake in public sector banks.  The recommendation suggested that inclusion of private players in the functioning of Banks will enable efficiency and competitiveness.

The move coming after 51 years of Bank Nationalisation, the idea was to align the banking sector with the socialistic approach.  State bank of India has been nationalised in 1955.

Before the nationalisation of 14 private banks in 1969, banks are not catering to the needs of common masses.  It benefits only the rich, powerful and it is confined only to urban areas.  In order to achieve broad based economic development, there is a revolution in banking sector from class banking to mass banking through Bank Nationalisation.  This paved the way for achieving equitable growth and reducing regional disparities by allowing small farmers, milk vendor, cottage industries and small entrepreneurs to approaching the banks for credit at reasonable interest rates.

With the bureaucratisation of Public Sector banks after bank nationalisation, there was an increasing political interference and the majority of loans were disbursed based on favouritism.

The concept of privatisation of the public sector banks has been part of economic reforms since 1991.  Due to the political backlash,  bank privatisation was not materialised into the system.  In the recent budget, the government announced to privatise two public sector banks in addition to IDBI.  

Earlier in February 2021, the government had released a new Public Sector Enterprises policy for Atmanirbhar Bharat. In that, it stated that the public sector commercial enterprises are being classified as Strategic and Non-strategic sector. 

The Strategic sector have been delineated based on the criteria of national security, energy security, critical infrastructure, provision of financial services and availability of minerals. Based on this, the following sectors are classified as Strategic sectors:

 1. Atomic Energy, Space and Defence.

 2. Transport and Telecommunications 

 3. Power, Petroleum, Coal and other minerals.

 4. Banking, Insurance and Financial Services. 

In Strategic sector, bare minimum presence of the existing public sector commercial enterprises at holding company level will be retained under Government control. The remaining enterprises in a strategic sector will be considered for privatisation or merger or subsidiarization with another PSE or for closure. 

NITI Aayog will make recommendations with regards to the CPSEs under strategic sectors, that are to be retained under the Government control or to be considered for privatisation or merger or subsidiarization with another PSE or for closure

What are the issues impacting the Public Sector banks?

Economic Survey quoted Gross Non Performing Advances of Public Sector banks is (6,09,129 crores)  9.4% at September 2020.  The mounting NPAs restrict the banks to lend and unable to generate enough income for the banks.

Internal crisis of banks due to Quality of boards where Directors and members of boards lacks vision but represents narrow sectional and economic interest.   The appointment process for managing directors lacks independence and transparency.  Compare to the Private banks, the pay structure for Top level and middle level management are very low which restricts the talented professional to participates in the governance of banks.  Honest banking officer missed their promotion for not following the Culture of Subordination in sanctioning the loans to undeserving borrowers.

Click the Pictures below to check the Top 50 corporate defaulters.

Performance of Private Sector banks:

There is a rising market share in loans from 21.26% in 2015 to 36% in 2020.  They have expanded the market share through diversified products, technology utilization and improved service delivery.  

There are concerns on Private sector banks over financial exclusions of the weaker sections, making household savings less secure by removing the sovereign guarantee of deposits.

On the other side, the private sector banks are not efficient as stated by the government. On a global level too, there saw a failure of many private banks, thus challenging the idea that private banks are efficient. 

Rising NPAs is mostly due to the credit provided to the private corporate entities, so what’s required is that corporate entities have to be regulated. Privatisation alone will not solve the issue of NPA. 

Private banks also have management issues - for example, ICICI Bank MD and CEO was sacked for allegedly extending dubious loans, the problem of YES bank recently in India. 

There is an under-reporting of NPAs in many private sector banks which was found in Asset Quality Review. 

Case Study on Yes bank:

In 2018, the YES Bank stock was trading at around ₹300.  A year and a half later, the Yes bank stock crashed to ₹5.55.  RBI imposed a month-long moratorium which means depositors cannot withdraw more than ₹50000 without written permission from RBI and also YES bank cannot lend loans or incur any liability.

The reason behind the failure was mounting NPAs and the companies that failed to repay their loans to YES bank includes Anil Ambani led Reliance group, DHFL and IL & FS.  Yes bank suffered from increasing gross NPAs to  ₹17,134 crore.

The failure of Yes Bank has been under reporting its bad loans for 3 consecutive years.  Invoking the section of the Banking regulation act, RBI took control over bank and change its management. The RBI announced that public sector bank SBI will bailout private lender Yes Bank.

Way Ahead:

The government has to focus on balancing the broad based economic and social development.  Rather than moving forward to aggressive Privatisation, the government must provide the rationale behind the disinvestment. The concerns of the Public sector banks employees need to be addressed and bring the institutional mechanisms to examine the accountability of Board executives.