But, is privatization really the solution?
In 1991, when the PSUs were struggling hard with inefficiencies and incompetence, the then Finance Minister Dr Manmohan Singh introduced the New Industrial Policy, which contained several reform measures for the public sector; some of which included the selling of loss-making units to the private sector, inviting private participation in PSUs and strategically selling the majority government stakes. This indicated a lower degree of early privatization.
And now, 30 years later, in 2021, when the economy is amid its deepest economic contraction on record and is on a tough call with an economic recession, the government is yet again trying to increase its financial stability by introducing privatization into a sector which was almost monopolized by the public sector; the banking sector.
According to the latest news, the Indian government has shortlisted four mid-sized state-run banks, namely Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India, for privatization under a new push to sell state assets and shore up government revenues.
But why banks?
Current Condition of PSU/Govt Banks
The condition of public sector banks in India has always been controversial, considering their constantly increasing burdens of NPAs and increased government interference. For instance, giving heavy loans to a variety of fraud industrialists and defaulters. Every time there was a case of heavy loan burdens, the government banks had to scoop up the entire pile and keep it with themselves.
Considering the latest disruption caused by the pandemic, the already-burdened banking system was further weighed down with NPAs and loan losses, which is still expected to rise once the banks are allowed to categorize all the loans given across during the pandemic as bad. And here, the majority lies with the public banks.
In fact, according to the latest Financial Stability Report by RBI, the gross NPA ratio of all commercial banks may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario. This would mean that the government would have to infuse more equity into weak public sector banks. Through privatization, the government is trying to strengthen strong banks and minimize the numbers of weaker banks to reduce its burden of support.
Another reason why public banks were chosen to be handed over to the private players can be the difference in how both types of banks are run. Private banks are profit-driven, whereas the government banks are always driven and often disrupted by government schemes that burden them even more.
Moreover, it can’t be denied that the added control of shareholders over private sector banks has caused fewer issues of large-scale frauds than public banks, wherein episodes like that of Punjab National Bank and the Punjab Maharashtra Cooperative Bank (PMC) happen quite frequently.
Can privatization actually resolve the problem?
According to Hindustan Times, two of the shortlisted banks will be selected for sale in the 2021/2022 financial year, which begins in April. So, to test the waters, the government is considering mid-sized to small banks for its first round of privatization. In the subsequent years, it could also look at some of the country's bigger banks.
History has shown that private players have always done better business as compared to government players. Who can forget the classic example of BSNL vs Airtel. Almost 21 years since its incorporation, and BSNL has still not been able to compete at the same level as any of its privately-owned competitors.
However, the other side of this coin shows that the privatization of government banks can put thousands of jobs at risk, which can cause yet another political turmoil as trade unions are already preparing to lock horns with the government.
Also, experts say that the shortlisted banks would not be easy to sell off as it’ll be difficult to attract investors due to their high number of bad assets and poor stability. And even if it happens, the sale of small, sick banks is unlikely to help the government raise much.
All in all, the entire picture will be quite vague until the banks are actually sold off. Privatization would certainly help beautify the crippling banking sector, but the question is:
Will it actually be able to solve the real problem of the inefficiencies in the banking sector?