Privatization of Public Sector Banks- Whose problem is it anyway?

-Penned by Priyank Tantia and Apoorva Grewal

The public sector banks (PSBs) went on a two-day strike on 16th and 17th December. It was called by the United Forum of Bank Unions (UFBU) to protest against the government’s plan to privatize two public sector banks, the Indian Overseas Bank (IOB) and the Central Bank of India. Over 9 lakh employees went on the 2-day strike.

In this year’s Union Budget, Finance Minister Nirmala Sitharaman had announced that two PSBs would be privatized during the current fiscal as part of the government’s Rs 1.75 lakh crore disinvestment target. The 2-day strike is against the Banking Laws (Amendment) Bill, 2021, which would be a step in that direction. According to various reports, the Bill, which will be taken up in the ongoing Winter Session of the Parliament, is expected to bring down the minimum government holding in the PSBs to 26 percent, from the current 51 percent limit.

What is privatization and why is it needed?

Privatization is the transfer of ownership, property, or business from the government to the private sector. The government ceases to be the owner of the entity or business. Privatization brings more efficiency and objectivity to the company, which does not concern the government.

Privatization of banks is a part of the larger disinvestment strategy followed by the Central Government. One of the major motives is ensuring that the government has a flow of money for its various investment plans. Secondly, banks have been dealing very inefficiently with the NPAs. Thus, the performance has been below substandard of the PSBs. Thus, with private ownership coming into the forefront to lead the business end, it is believed that the banks would be much more efficient. Further, this would ensure a fresh flow of money into the banks. Because of rising NPAs, the banking and the credit industry has been going through a rough patch.

Issues with Privatization

To understand the underlying issues with bank privatization we need to take a step back and understand why banks were nationalized in the first place. The year was 1969 and within 34 years of the formation of Reserve bank of India, the country had seen 900 bank failures, over 600 of them after independence. A bank is not like any other business where the owner’s equity is at stake in case the business fails. When banks go down, they take with them the depositors’ money, the social capital of a country. This is bound to have a domino effect on the entire economy. This is why irrespective of the ownership structure of a bank, the government often steps in to ‘nationalize the losses’ with taxpayers’ money.

The stakeholders of the banking industry are not just the bank owners, employees and its customers but the entire society including the government and other parts of the economy with intricate linkages to these financial institutions. Public Sector Banks have been known to spearhead economic development of our country with a focus on inclusive development with priority sector lending and flagship schemes like Pradhan Mantri Jan Dhan Yojana. They serve the remotest corners of the country where the most vulnerable reside. Small farmers and traders, MSMEs, and backward sections of the society enjoy the benefits of highly subsidized loans, direct benefit transfers under various schemes like PM Garib Kalyan Yojana, and affordable banking services run by these entities. Privatization shifts the focus from social welfare to profit-making. If a corporate house does not find it viable to maintain a branch in rural areas it would lead to financial exclusion of these groups because the entity cannot be compelled to provide these services.

Why it matters

Driven by profit, private sector banks generally concentrate on the more affluent sections of the population and the metropolitan/urban areas. Therefore, privatization of PSBs might lead to the financial exclusion of the weaker sections of society, particularly in the rural areas. Moreover, it will also put these private banks under limited applicability of RTI, thus decreasing accountability and protection against foul play. It could also increase the cost for the public as private banks would be driven towards profit maximization and not serving the public. Nevertheless, at the same time, customers can hope for better services and efficiency from these banks. As for the employees, though Union Finance Minister Nirmala Sitharaman has said that there will not be any change in employees’ pay scale, salary structure, and pension, employees are still worried as it may hamper their job security. Further, it might affect job opportunities in the banking sector and affect the representation of OB, SC, ST, and other reservations.

The road ahead

At present, many state-owned banks are not attractive enough for buyers so the state first needs to pump in additional capital in them and deal with hostile employee unions before it can find any takers. Also, in the absence of any supporting legal and regulatory framework privatization alone may not be able to solve the problems plaguing the banking industry and may end up being crony capitalism in disguise. What we really need is governance reforms in the state-owned banks, bringing in professional and expert leadership, and greater authority to the board of directors. Alternatives such as the golden share concept can be considered to assuage public sentiment where the government divests its share of the Public Sector Banks upto 33 per cent for recapitalization yet retains control in the form of veto power. By definition private, profit-making entities are believed to make the most efficient use of resources in a perfectly competitive market. Therefore, to give a boost to private investment in banking, the government must make sure that it creates an enabling and encouraging environment first where the interests of all stakeholders are protected.


Aishwarya | Ayush | Bhavya | Jayati | Shivika | Varshita
Apoorva | Jeevan | Priyank | Rajdeep | Sakshi | Shelly | Varnika

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