The privatization of public sector banks

The privatization of public sector banks

Subject :Economy

Section: Banking

Context :India’s public sector banks have struggled with high levels of non-performing assets (NPAs) leading to restriction of normal functioning and decline in profitability

• Steps taken:
  • RBI has put many Public sector banks under Prompt Corrective Action (or PCA)
  • Recapitalisation of banks
  • Privatisation of PSBs

Arguments in favour of privatisation:

• Reduce the financial burden on the government 
• Banks would be more efficient and profit-making entities under private ownership
• Private sector banks have lower bad assets

• Higher percentage of contribution in getting deposits from savers and lending.

• Better contribution in employment generation and branch addition

• Less prone to banking fraud

• Higher market capitalisation than PSB

Arguments against rapid privatization:

• PSBs source of rural development  and financial inclusion
  • Private banks dominate the metropolitan areas, it is the public sector banks that operate branches in rural India. 
  • Further PSBs opened more ATMs in rural areas  
  • Private sector banks accounted for just 1.3 crores of the total of almost 46 crore beneficiaries under the Pradhan Mantri Jan Dhan Yojana (PMJDY).
• As per RBI report contrary to public perception, PSBs are more efficient than PVB, on the metric of objective fulfillment.
  • When profit maximisation is the sole motive, efficiency of the PVBs has always surpassed that of their public sector but when the objective function is changed to include financial inclusion—like total branches, agricultural advances and PSL advances— PSBs prove to be more efficient than PVBs.
• Dominant share in Infrastructure finance-low profitability and long gestation projects
• PSBs are also more effective in monetary policy transmission, aiding the countercyclical monetary policy actions to gain traction.

Conclusion-focus should be laid on achieving a mix of public and private banks that best serves the needs of a diverse economy such as India.

Concept:

Scheduled Commercial Banks’are banks included in the second schedule of the RBI Act. It comprises Public Sector Banks, Regional Rural Banks, Private Sector Banks, Small Finance Banks (SFBs), Scheduled Payments Banks and Foreign Banks.