PRIVATISING PSB

Context

Key points

• Over the past decade, PSBs have struggled with high levels of non-performing assets (NPAs), which have eroded the bank's profitability and restricted their ability to finance India's growth needs.
• In dire cases, the government had to recapitalise PSBs triggering demands that instead of wasting taxpayer money on recapitalisation, the government should simply sell the bank off to the private sector.
• Doing so would reduce the financial burden on the government, while also ensuring that PSBs become more efficient and profit-making entities under private ownership, it has been argued.
• By 2021, the government had reached a point where in the Union Budget 2021-22, it announced its decision to start by privatising two PSBs.

Total and Rapid Privatisation

• All PSBs should be privatised and the government should move as rapidly as politically feasible.
• Conceding that this might be politically difficult for any Indian government to do a middle path of privatising all PSBs except the biggest, the State Bank of India (SBI).

• Private sector banks (PVBs) were not only more efficient but also more profitable and far less susceptible to fraud. 
• Between 2014-15 and 2020-21, PVBs contributed more towards extending loans and had a higher share of deposits from savers.
• More branches created new jobs while the PSBs saw declines on both counts.
• The fraud amounts have concentrated disproportionately in PSBs.
• Unsurprisingly, there is a stark difference in the market capitalisation of PSBs and PVBs.

A cautious, gradual approach 

RBI's August Bulletin

• It urged people to employ a more "nuanced approach."
• It argued that "a big bang approach of privatization of these (Public sector or government-owned) banks may do more harm than good".
• RBI's researchers compared and contrasted the performance of PSBs and PVBs over different metrics.
• Data since 2010 the time when PSBs have been at their weakest.

PSB are more socially relevant in India

• The point of nationalising private banks in 1969 was to reach out to those sections of society and the economy that were typically ignored by private sector banks.
• RBI's researchers found that PSBs are far ahead of PVBs in servicing rural India.
• They have far more branches and ATMs in rural India.
• PSBs also do the heavy lifting when it comes to financial inclusion.
• Private sector banks accounted for just 1.3 crores of the total almost 46 crore beneficiaries of Pradhan Mantri Jan Dhan Yojana (PMJDY).

PSBs are the most cost-efficient

• The RBI's researchers noted that When profit maximisation is the sole motive, the efficiency of the PVBs has always surpassed that of their public sector counterparts.
• 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.

PSBs are more useful to the economy

• The RBI's research shows that PSBs, far more than the PVBs, extend loans when the economy is in a cyclical downturn.
• This is crucial because a downturn is when new loans are most needed to put the economy back on to a growth trajectory.
• This also shows up in the choice of sectors that PSBs lend to infrastructure.

Infrastructure finance

• It has been a bottleneck in the country's development and growth.
• PSBs have a lion's share in these lendings and their role has been especially crucial against the backdrop of the withering away of erstwhile development financial institutions.

Monetary policy transmission 

• PSBs are more effective in monetary policy transmission.
• During the last easing cycle (February 2019 to March 2022), for example, PSBs' reduction in lending rates was substantially higher than that of PVBs.
• At the same time, PSBs' deposit rates were relatively stickier than PVBs.
• While this reduces the incomes of PSBs vis-a-vis PVBs shows that PSBs contribute to larger social goals.

Conclusion