Privatisation of Banks

ECONOMY/ GOVERNANCE

Topic:

• GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment; Government Budgeting
• GS-3: Government Budgeting

Privatisation of Banks

Context: In the Union Budget for 2021-22, the government has announced taking up the privatisation of two public sector banks (in addition to IDBI Bank) and one general insurance company in the upcoming fiscal.

Laying down a clear policy roadmap for disinvestment, the government has identified four strategic sectors in which it will have bare minimum presence. 

1. Atomic energy,space and defence; 
2. Transport and telecommunications; 
3. Power, petroleum, coal and other minerals; 
4. Banking, insurance and financial services.

All CPSEs in other sectors will be privatised.

Do You Know?

• PSU banks are under dual control, with the RBI supervising the banking operations and the Finance Ministry handling ownership issues.
• Many committees had proposed bringing down the government stake in public banks below 51% — the Narasimham Committee proposed 33% and the P J Nayak Committee suggested below 50%. 

Which are the two PSBs that will be Privatised?

• Currently, there are ten nationalised banks in addition to IDBI Bank and SBI. 
• While the government is unlikely to touch the top three including SBI, smaller and middle-level banks are likely to be privatised.
• Government has not disclosed which two banks will be privatised this fiscal.
• The two banks that will now be privatised will be selected through a process in which NITI Aayog will make recommendations, which will be considered by a core group of secretaries on disinvestment and then the Alternative Mechanism (or Group of Ministers).

Reasons for Privatising Public Sector Banks

• Previous reform measures have not yielded results: Years of capital injections and governance reforms have not been able to improve the financial position of in public sector banks significantly. Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalisation and dividend payment record.
• Aligned with Long Term Goal: Privatisation of two public sector banks will set the ball rolling for a long-term project that envisages only a handful of state-owned banks, with the rest either consolidated with strong banks or privatised.
• Reduces Government Burden: Privatisation will free up the government, the majority owner, from continuing to provide equity support to the banks year after year. The government front-loaded Rs 70,000 crore into government-run banks in September 2019, Rs 80,000 crore in in FY18, and Rs 1.06 lakh crore in FY19 through recapitalisation bonds.
• Rationalisation of Banks in Post-COVID Scenario: After the Covid-related regulatory relaxations are lifted, banks are expected to report higher NPAs and loan losses. This would mean the government would again need to inject equity into weak public sector banks. The government is trying to strengthen the strong banks and also minimise their numbers through privatisation.
• Changed Approach to Financial Sector Problems: Privatisation and proposal of setting up an asset reconstruction company entirely owned by banks, underline an approach of finding market-led solutions to challenges in the financial sector.
• Private Participation promotes innovation in market: Private banks’ market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%. They have expanded the market share through new innovative products, latest technology, and better services.

What are the challenges associated with increasing Privatisation of Banks?

1. Private banks are not without faults

• In the last couple of years, some questions have arisen over the performance of private banks, especially on governance issues. 
• ICICI Bank MD and CEO Chanda Kochhar was sacked for allegedly extending dubious loans. 
• Yes Bank CEO Rana Kapoor was not given extension by the RBI and now faces investigations by various agencies. 
• Lakshmi Vilas Bank faced operational issues and was recently merged with DBS Bank of Singapore. 
• Former Axis Bank MD Shikha Sharma too was denied an extension.
• Moreover, when the RBI ordered an asset quality review of banks in 2015, many private sector banks, including Yes Bank, were found under-reporting NPAs. 

2. Dangers of private banks repeating the mistakes of 1960s

• There is widespread perception that the private sector then was not sufficiently aware of its larger social responsibilities and was more concerned with profit.
• This made private banks unwilling to diversify their loan portfolios as this would raise transaction costs and reduce profits.
• The expansion of branches was mostly in urban areas, and rural and semi-urban areas continued to go unserved

Conclusion

The initial plan of the government was to privatise four. Depending on the success with the first two, the government is likely to go for divestment in another two or three banks in the next financial year.

Connecting the dots:

• Corporates as Banks: Click here