Mentors Comments:

1. Discuss the proposal of privatization being mooted by several committees and economists.
2. What are the benefits of the proposal? What challenges does it pose?
3. What are the immediate steps to be taken to address Banking sector challenges?

https://www.livemint.com/opinion/online-views/opinion-the-case-for-privatizing-public-sector-banks-1567967550243.html

Answer:

Public Sector Banks (PSBs) in India is fragmented, with some of them reeling under the mounting pressures of Non-Performing Assets (NPAs). The Public sector banks (PSBs) accounted for 8.9 trillion, or 86%, of the total NPAs. The PJ Nayak Committee in 2014 had suggested that government share should come below 50% i.e. privatize state-owned banks.

Arguments in favor:-

• Many countries have privatized their nationalized banks, including some from the erstwhile Eastern bloc countries. Argentina, Australia, Brazil, Bulgaria, Chile, Denmark, Egypt, etc.
• Privatizing loss-making PSBs will have a deterrent effect on the staff and management of such banks.
• Also, privatising a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs.
• Better financial performance is ensured when a strong financial institution is involved as a significant shareholder in privatisation.
• The government’s liabilities will also decrease and it could invest resources released by this exercise into welfare schemes.
• It will be another step towards reducing the fiscal deficit and financing revenue expenditure through revenue receipts in the long term.
• This move is along the lines of minimum government and maximum governance and proactive, people-centric, people-friendly, transparent and sustainable governance.
• With the reduction of the government’s share below 50% in Public Sector Banks, banks will be freed from external vigilance by the Central Vigilance Commission, the Right to Information Act (RTI), and from government constraints on employee compensation.
• The government’s share below 50% would end the government’s diktat in several loan waiver announcements, thus ending vote bank politics.

Argument against:-

• Any such move would prove detrimental to the economy and result in turmoil within the industry.
• This would totally defeat the idea of inclusive banking as it is practiced now and was the guiding principle at the time of the nationalization of banks.
• The past history of private sector banks tells the failure. Before 1969, all banks, except the SBI, were in the private sector. Between 1947 and 1969, 559 banks failed.
• Public sector banks are created out of public money. These entities are therefore duty-bound to extend all types of services to customers across categories. Privatization will impact this very root purpose
• The government will have difficulty in providing low-cost financial services to rural and poor sections of society as the private may not like to extend its services to them.
• The loosening of the government’s control over the economy might make is the economy fragile in testing conditions.
• Private profiteering and drain of national wealth through revenues accruing from FDI are also major concerns.
• Private sector banks don’t share the government’s social responsibilities. Even in matters of recruitment, they don’t follow the government’s reservation policy or don’t show any enthusiasm in giving education loans to needy students. Thus, we can see that privatisation is not the solution to problems facing PSBs. The solution lies in making the public sector more robust, not pawning it in the hands of a few powerful individuals.

Way forward-

• We need a broad set of actions, some immediate and others over the medium-term and aimed at preventing the recurrence of such crises. Wholesale privatization of PSBs are thus not the answer to a complex problem.
• Overall risk management at PSBs needs to be taken to a higher level. This certainly requires the strengthening of PSB boards. We need to induct more high-quality professionals on PSB boards and compensate them better.
• In the case of banking, what is needed is increased autonomy for state-backed banks and strict regulatory oversight by the banking supervisor.
• The boards of state-backed banks should be independent of political influence.
• Managers should be held accountable for operational performance and there should be constant monitoring of targets, risk assessment, and credit controls.
• The clean-up of bank balance sheets and the overhaul of India’s archaic insolvency law are steps in the right direction, but they will only bear fruit if accompanied by improved governance and regulation.

The Privatisation of PSBs is not going to be easy, as it would involve building consensus amongst various stakeholders, including unions and parliamentarians. Further, Bank privatization, without strengthening regulatory controls and improving governance, won’t prevent fraud or curtail undue exposure to risk.