The publication of RBI monthly bulletin of August 2022, containing an article on privatisation of Public Sector Banks, has reshaped the narrative, by bringing in sharper focus the issue of Public Sector Banks (PSBs) versus Private Sector banks.

The opinion of the research paper, as clarified by the RBI subsequently, is not necessarily the opinion of the RBI. The research paper is in sharp contrast with that of the report of NACER, jointly submitted by former Niti Aayog Vice Chairman and economist Arvind Pangariya and Poonam Gupta, espousing the cause of privatisation of all Public Sector Banks, excluding the State Bank of India.

The NACER report says that private sector bank shall act as a credible alternative, with substantial market share. The Government ownership hinders the ability of RBI to regulate the sector properly. The PSBs lag behind the private sector banks, in all the major performance indicators, since the last decade in areas such as increase in stressed assets, high operating cost and lower returns on asset and equity. Thus, the PSBs have lost ground to private sector banks both in deposit mobilization and growth in advances. The under performance of the PSBs is of persisting nature despite remedial steps taken by the Government of India from time to time, by recapitalization, at the expense of the national exchequer.

There are many new initiatives which have been rolled out such as  streamlining appointment of Chief Executives, by constituting Bank Board Bureau, presently FISB, streamlining corporate governance, and merger and consolidation of banks, thereby reducing 28 PSBs into 12 at present.

The NPA remains at an elevated level. The Government has recapitalized the PSBs by infusing Rs 3.11 lakh crore approximately in the last 5 financial years. Market capitalisation of the PSBs is far lower than the private sector banks. It is ascribed to loss of confidence of the public in PSBs,which has led to the lower valuation. It is said that the Government’s stake should be reduced to 50% and in a period of 15 years it should be reduced to 20%, being the new investment norm for the corporate sector.

The entire issue assumes significance,when the Government decided to sell the family silver by way of disinvestment, as per the Budget proposals of 2022, setting the ball in motion. The decision to sell is a part of the Government’s mega plan of disinvestment in public sector enterprises like BPCL, Air India and so many others, as the fiscal deficit has broken the mandated level of 3% of GDP.

Privatisation of sick and defunct unit is the goal of the present dispensation. Nationalisation of 14 commercial banks on July 19, 1969  as the watershed moment in the annals of India’s economic history and is termed as the greatest financial sector reform. Subsequently, six other Commercial Banks were nationalised and with Nationalisation of the Associate Banks of SBI, total 28 Nationalized Banks contributed to the growth of Indian story. This was done by Indira Gandhi in July 1969, to take social control over the banks as the private sector banks were monopolistic, aiming at concentration of wealth and without branch expansion. Their only motive was maximization of profit without branch expansion or rural credit offtake or promotion of lending to agriculture or priority sectors that had already resulted in an uneven growth, regional imbalance, and class banking without mass banking, and was confined to urban areas.

At the time of nationalisation, there was around 8,000 bank branches, and one bank for 65,000 people, and only 5,000 branches for 6.38 lakh villages. Today, there is massive branch expansion in every nook and corner of the country, making financial inclusion possible and spreading the gospel of inclusive growth. The Pradhan Mantri Jan Dhan Yojana (PMJDY) initiative has added 44 crores accounts, having a credit balance of 1.3 trillion in deposit accounts. The share of women depositors under PMJDY is almost 56% and the Government assistance as well as support under different schemes have percolated to the beneficiaries accounts including MGNREGA which is biggest contribution of the nationalised banks.

So, in a country like India with vast population, the nationalised banks have ushered in a perfect revolution with sectoral growth, regional development and national integration. The Narsimham Committee on Financial Sector Reforms of 1991 had recommended 3 large international banks, 8 to 9 national banks, and large number of rural and regional banks and laid greater thrust on autonomy in banks without raising privatisation issue. The RBI paper hinted at the role of nationalised banks in financial inclusion and inclusive growth.

Nationalised banks have aided Indian agriculture, priority sector, MSME sector, project financing, educational loan to the deserving and needy, and to weaker sections which is not the primary policy of private sector bank. So, the PSBs have aimed at stabilisation of growth. They have continuously implemented MUDRA scheme, Skill India, transfer of PM KISAN funds etc. The role played by the nationalised banks in demonetisation and other Government scheme is commendable. It is not that private sector banks have not failed. The problems in ICICI banks, YES Bank, Laxmi Vilas Bank etc. is a pointer to the fact that all is not well in private sector banks, with NPA accumulating, as of late.

The debacle of PSBs was because of over-exposure and accretion of NPA, faulty appraisal, working under pressure, loan melas,waiver of loans, poor appraisal, huge provisioning, implementation of unproductive schemes, and overall failure to strictly implement the legal route through SARFESI Act,DRTs, and poor implementation of willful defaulters’ provision. The IBC is a better piece of legislation that helps banks to recover its dues.

With Government’s intervention in catching the economic offenders, the recovery climate is improving, bringing transparency and efficiency. The RBI research paper has indicated that there should not be a big bang approach in privatisation and it has to be slow and steady. With both PSBs and private sector banks at same technology level, the privatization of PSBs can be done in a piecemeal manner based on performance indicators. With almost all PSBs having almost 70% or more of provision coverage ratio, making the laws more powerful in recovery mechanism will initiate paradigm shift in bank profitability. The Government seems to have paused in its drive for privatisation and let us hope for a return of strong PSBs as torch-bearer of Indian economy.