Privatization of India’s Public Sector Banks

The Indian banking sector is facing a crisis on an unprecedented scale. The problem becomes peculiar when more facts are brought to light. Indian banking sector can be divided into two categories. There are private sector banks, and there are public sector banks. The private sector banks seem to be performing well. However, public sector banks have become a menace. The non-performing assets in these banks are rising at an alarming rate. As a result, the Indian government has announced a $19 billion recapitalization plan. This plan is meant to give the banks some breathing space while they get their finances in order. However, recapitalizing banks does not seem to be working. The recent fiasco at the Punjab National Bank has revealed that the problems facing Indian banking are structural in nature. They cannot be solved using cosmetic measures.

The recapitalization of banks may prove to be a potent fix in the short run. However, it will not be long till these same banks find themselves in the middle of another crisis. Many critics have suggested that privatization of banks is the only way that India’s public sector banks can be transformed into entities which are commercially viable. They believe that public sector banks should be run by bankers and not bureaucrats is taking root in the psyche of the average Indian.

In this article, we will have a closer look at some of the possible benefits that will accrue as a result of privatization of banks as well as some of the possible hindrances.

Imposing Morality on Finance

Indian banking sector was earlier in private hands. However, during the 1970’s, the Indian government was of the opinion that banks favor the rich and that the poor must also be given access to cheap credit. With this view, several banks were nationalized. It is a huge irony that the banks which were nationalized based on pro-poor agenda are today facing mounting losses because they have loaned out huge sums of money to the rich without proper diligence.

The present-day Prime Minister of India, Mr. Narendra Modi firmly believes that the job of the government is to govern. He also believes that the government has no business meddling in any other business. That does not seem to have prompted him to privatize the twenty-one public sector banks which are under the control of the government today. These banks account for over 70% of all credit creation in India. Also, since these banks do not ration their credit as per the market mechanism, the government meddling leads to gross malinvestments. In simple words, this means that poor projects with questionable rates of return are funded by these banks because the system is run by political connections and corruption.

Benefits of Privatization

Bank privatization is likely to provide a lot of different benefits. Some of the most obvious ones are listed below:

1. Increased Efficiency:

   The private sector banks in India are already much more advanced than the public sector banks. Even though the nationalized banks have a large depositor base, they are always playing a game of catch up. This situation is likely to worsen over the years. This is because foreign investments are now being allowed in private sector banks as well. Hence, foreign banks are likely to acquire stakes in some of these banks. They will also introduce some of the operational efficiency that foreign banks are known for, in Indian banks. On the other hand, private sector banks are reeling with loan frauds and so on. The fact of the matter is that these banks are simply not competitive.

2. Compliance and Risk Mitigation:

   Experts in the banking sector are bewildered at the inefficiency displayed at Punjab National Bank. How is it that with the connivance of a few junior level bank officials, a businessman was able to defraud the bank of $1.8 billion? This sort of incident is never reported at banks like Citibank and J.P. Morgan even though they operate in several nations and have more complex operations. Privatization of banks will ensure that they benefit from compliance norms and risk mitigation processes followed at these banks.

Problems Associated With Privatization

At the current moment, it does seem like privatization is the only viable solution. However, that is not the case. There are several problems associated with privatization.

No Buyers:

The Indian banking sector has received some very bad PR in the recent past. The entire world knows that the loan book of these banks is less than optimum. It is also an open secret that had these banks not been backed by the government, most of them would have been bankrupt by now. The balance sheets of these banks show positive equity only because they are in possession of some of the priciest real estate that the government owns. It is obvious that the government would not like to sell its real estate. Hence, the only thing that they would be selling is a banking license with a dysfunctional portfolio. Most analysts in the banking sector are of the opinion that the government would be lucky to find even a single buyer given the state of affairs at these banks.

Worker Unions:

Also, these government banks have a huge payroll. Their employees are considered government employees and cannot be easily sacked. The moment they hear about privatization, it is likely that they will panic. This is likely to start protests and political fights all over the nation. Managing the workforce will be one of the biggest challenges that the Indian government will face if they decide to privatize these ailing banks.