essay on privatisation of banks in 250 words

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No. 1 UPSC IAS Platform for preparation

Argue for and against the privatisation of Public Sector Banks in India. What do you think is the need of the hour to reform the Indian banking scenario. (250 Words)

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

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.

Please review MOJO9902Y00D71079365

Avoid such rhetorical intros. Too much explanation is there. The main issue is tackled after a long time and that too there is no conclusion. Please, start working on your answers as suggested by us. You are writing like a newspaper editorial.

Mojo id-MOJO9908R00A36163556

Weak intro. Discuss the topic in hand in the intro always and why it was in the news. You are discussing arguments regarding mergers and the consolidation of banks. But the main question is regarding the debate around the “PRIVATISATION” of banks. Please read the question carefully and then answer accordingly. Poor way forward. Read the model answer.

Please find attached

Here it is.

Payment ID: MOJO9731Y00N34245077

Underline important points. Write way forwards in a better structure. Apart from that, answer is fine in terms of direction and content. Good arguments from both sides.

Pls review Payment ID – MOJO9731S00A34242506

Good that you mentioned the Nayak committee. Very good answer. It has all the necessary dimensions required. The points are deep and wide. Underline important points in your answers to make the presentation better. Very good way forward.

MOJO9731E00D34250209

Mention the Nayak committee in your intro. The 1st part of the main body is nicely discussed. But the 2nd part needs more depth in terms of points. Plus the 2nd part suffers from over-explanation in certain aspects. You have to also mention that the NPA issue is a serious issue even in private sector banks. Good way forward.

MOJO9903Q00A58015795

You have to also mention that the NPA issue is a serious issue even in private sector banks. Better and more way forwards are needed. Read the model answer for that. The main body is good. It has most of the arguments necessary in the answer. Good structure and presentation. Points are short and crisp.

MOJO9801U00N04106675Sir Please, Review My Answer.

The content and direction of the answer is very good. It is deep, wide and has proper coverage. The structure is smooth and very good. The presentation can be made better. Good answer overall.

Payment ID: MOJO9802W00A98715356 Please review

Detailed answer. Well tried. All the parts are covered nicely. Balance, structure and presentation are perfect. Good depth of the content.

MOJO9803C00N96073071

What are the recommendations of the Nayak committee? When mentioning any committee in your way forward, then do mention some of its recommendations. Apart from that, content is good but the presentation is weak. The flow chart needs to be self-explanatory but it is not in this answer. The overall direction and structure are decent. Try not to make your answer look like a rough answer.

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Privatisation of Banks Advantages and Disadvantages | Privatisation of Banking Sector In India Pros and Cons Explained

October 21, 2024 by Prasanna

Privatisation of Banks Advantages and Disadvantages: The term ‘Privatisation’ means the transfer of any business, company, firm, industry, or such service already existing in a society that is shifted from public to private ownership or control.

In other words, privatisation is the name given to the process where a   government-owned business or operation is brought under the ownership by any private and non-government body.

Privatisation similarly describes the transformation of a company from being a publicly traded company to converting it into a privately held company.

Enterprises that the government themselves does not run include the majority of the private sector. Individuals can privatise any such company free from direct government ownership.

Students can also find more  Advantages and Disadvantages  articles on events, persons, sports, technology, and many more.

Private companies constitute the preponderance of firms in industries such as consumer discretionary or staples, banking or investment, information technology, manufacturing sectors, real estate, trade assets, and healthcare quarters in society. All these are examples of firms that We can privatize.

Privatisation is seen to be beneficial for the economy. Privatisation aids in keeping the consumer requirements the topmost cause for economic development. It also helps the government clear company debts and increases long-term jobs in the market.

Privatisation encourages competitive efficiency also an open market economy in the country.

What is Privatisation of Banks? Advantages and Disadvantages of Privatisation of Banks 2021

Under Prime Minister Narsimha Rao’s and the former Prime Minister Manmohan Singh’s, the process of privatisation was brought to the vanguard.

In the year of 1969, the Government of India had nationalised a total of fourteen central private banks. One of which was the bank named Bank of India or BOI.

In the year 1980, again, the government nationalized six more private banks in India . These nationalized banks make up the majority of pawnbrokers in the Indian economy.

Besides the privatisation of the banks, the Central Government played an active and direct role in the depreciation of their activities in the daily activities of the banks mentioned above.

Also, the government would offload the majority stake held by the Centre in favour of private banks, which, in turn, would increase the engagement of PSBs in the exchange   with minimum financial dependence on government funds.

This article aims to explain in great detail the following about the Privatisation of Banks:

Advantages of Privatisation of Banks

Disadvantages of privatisation of banks.

• Comparison Table for the Advantages and Disadvantages of Privatisation of Banks
• FAQS on Pros and Cons of Privatisation of Banks

• Profitable venture: The majority of the private banks are successful, to a considerable extent. Many PSUs are still stagnant and unable to profit. For this reason, the government has decided that privatisation of PSU banks might save them from further loss ventures and aid them in making profitable and self-sustainable businesses.
• Better advancement: It is understood that the banks belonging to the Private sector are further advanced than those in the public sector. They are additionally known for their exceptional operational efficiency. Any private firm has the pressure to perform efficiently. One of the significant reasons for private banks being able to achieve such quality is profit, which makes them even more competitive with extraordinary service to gain more customers.
• Better regulation by the Government: The process of privatisation is also helpful for the reduction of the responsibility of the Government of India which is since private banks are more stringent towards loans and frauds.
• Benefits from Foreign Investments: The majority of foreign investors favour investing in private sector banks over those under the public sector. Hence, it benefits the economy through foreign investment funds as well.
• Set practical long-term goals: When banks face a problem, the government usually takes resolutions based on the choices that would be best for citizens for the next election. Banks of the public sector are also constantly dominated for political motives. Implementation of privatisation will allow such banks to set their long-term goals and worry less about government interference.
• Difficulty of profit and finance: The government aims to sell the less profitable companies. The private sector is unwilling to purchase an acceptable amount from the government. Developing countries sometimes make it challenging for the government to finance such large purchases.
• Resistance from Employees: Employees who are at potential risk of losing their jobs and fear short-term unemployment due to the liquidation by private to those sections of the public fearing that foreigners are affecting national assets tend to withdraw investment in banks.
• Indecent Working and High-priced economy: The private sector is uninterested in cost reduction or quality production, which leads to unfair practices in which many businesses indulge in corruption. The private sector’s production cost is frequently high due to mediocre technology and poor management, leading to disputes. Overpriced raw materials and other components and a high rate of indirect taxes are also the reasons for the high-priced economy.
• Economic power and dependence on government: The dominance of a few business groups concerning capital and goods is a socio-economic problem that harms the consumers and society. Although the government’s control of the private sector has prevented dominance to an extent, it is still insufficient. The private sector is overly dependent on the government to satisfy its import requirement, finances, etc., which has diminished the private sector’s capacity to continue on its own.
• Unguaranteed of Success: Privatization is unguaranteed in terms of the success rates of any individual unit, due to which many private sector units suffer huge losses.

Comparison Table for Advantages and Disadvantages of Privatisation of Banks

FAQ’s on Pros and Cons of Privatisation of Banks

Question 1. What happens when a particular bank gets Privatised?

Answer: When a private entity buys a particular bank, the government gets its capital in return. The gross amount of this capital depends on the current market’s condition and the bank’s internal strength, such as the number of branches it holds, customers, etc. In any of these cases, it cannot be lower than the current market capitalization.

Question 2. Why does the privatisation of banks happen?

Answer: Privatization describes how a particular bank moves from existing by the government to have private ownership.

It is usually to help the government save money and boost efficiency, where the private banks can move goods faster and with higher efficiency.

Question 3. Which banks should the government privatize?

Answer:  Indian Overseas Bank and Central Bank of India are feasible banks for privatisation. The government has estimated ₹1.75 crores from the stake deals in public sector organizations and financial establishments during the current fiscal year, including one insurance company and two PSU banks.

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Essay on Impact of Privatization for Students and Children

500 words essay on impact of privatization.

When we say privatization, a lot of things come to one’s mind. They are both positive and negative. It basically refers to the shift of control from the public sector to that of private. The first world countries brought this concept first after which the developing nations caught on the trend.

In other words, it mainly aims to enhance the conditions of the services which people get. In addition, it also lowers the burden of the government by taking over certain industries. Privatization has no doubt made quite an impact on the world. Like there are two sides to a coin, over here also comes with benefits as well as drawbacks.

Benefits of Privatization

Privatization has created quite a positive impact on the world. Firstly, it has reduced government debts. Similarly, it has lessened the burden of the government. Furthermore, the quality of services has enhanced by a great margin. As there is increasing competition in the private sector, everyone is competing to give their best.

Moreover, there are now new products that are entering the market on a daily basis to help people get innovative goods. This helps in mixing creativity with private making and it also benefits the consumers greatly. In addition to that, political interference in various sectors has stopped which is a great sigh of relief.

Most importantly, the scenario of rates has increased. Due to the ever-growing competition in the industry, everyone is trying to make the most out of their goods. In order to do that, they offer competitive rates so that everyone can benefit. This brings profits to consumers as well as business owners.

Drawbacks of Privatization

While privatization has numerous benefits, it also has a fair amount of drawbacks. The first one being the drop in quality of goods as they mainly aim to make a profit. When people have this intention, they have little or no care about the benefit of the customers, so just to gain maximum profit, they compromise the quality and opt for unfair means.

In addition, there is also the drawback of the rise in prices. As the private owners usually have a monopoly, they take advantage and charge high prices knowing very well that consumers will have no choice left but to do so. Similarly, this also gives rise to the rise in corruption. There are more and more cases of bribery, fraud, and others on a daily basis.

Moreover, transparency levels also drop due to this. In the public sector, people get a clearer picture than in the private sector. As they are not obligated to transparency, they often deceive the consumers. Other than that, privatization has also caused uncertainty amongst the consumers.

As there are more and more options being added to the market every day, the same product is sold at different forms and prices. This just leads to confusion and difference in quality. Thus, we see how it has both positive as well as negative sides. Consumers need to be more careful and not be fooled.

Some FAQs on Privatization

Q.1 How did privatization benefit us?

A.1 Privatization has a lot of benefits. It reduced the government’s debts, improved the services and also helped in introducing innovative products. Moreover, it also stopped any political interference plus brought competitive rates.

Q.2 What are the drawbacks of privatization?

A.2 Privatization also has some major drawbacks. Its main aim is to make a profit with little care to consumer wellness. There was also a price rise plus corruption rise after privatization. Moreover, it also created a lack of transparency and ambiguity in society.

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Privatization of Banks Pros and Cons

Table of Contents

Privatization of Banks? What is a Bank? The word ‘Bank’ does not need any kind of introduction. Everyone, now a day, is familiar to what Bank is. It is a financial institution that works according to the structure of the economy and helps to promote it. Banks have proved to be very helpful in connecting the people directly to the economy of the nation. Banks are mainly authorized to receive the deposits of the people and also provide them loans easily and according to their need. Banks are the key to drive the economy smoothly and efficiently.

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Short History of Banks in India

“ The Bank of Hindustan ”, established in 1770, was the first Bank of India which ran for about 60 years and soon failed. The modern day “ State Bank of India ” was established in 1806 and was first named “ Bank of Calcutta ”. It was later renamed as the “ Bank of Bengal ” by the British Government. Soon this bank merged with “Bank of Madras” and “Bank of Bombay” and formed a new bank called “ Imperial Bank of India ”.

“ Reserve Bank of India (RBI) ” which is the central banking institution in India, was established on 1 st April 1935 with the RBI act 1934. In succeeding years, India got many other private banks working well with the economy. The Government of India took a step to nationalize the 14 major banks of India in 1964 after independence. After the 6 years, 6 more banks were nationalized in 1970 and thus we got 20 nationalized banks in India but soon “ The New Bank of India ” merged with the “Punjab National Bank” and now we have all over 19 nationalized banks in India.

Functions of Banks

The basic functions of all the banks are to deposit the savings of the customers through opening their Bank accounts and also providing them loans. These are the functions that every bank in India works on. Apart from these two basic operations, the modern day Banks also work on many other financial activities. The functions of a bank are as follows:

• Deposit Savings
• Providing loans
• Mutual fund
• Providing lockers
• Conducting social welfare programs
• Transferring funds
• Collecting cheques

As it will not be wrong to say that The Banks absorb the excess capital from the economy stopping them from being circulated and use them in the right direction properly to increase the productivity and the growth of the nation.

Public Sector and Private Sector Banks

Before we further proceed, it is very important for us to understand what the key difference between a public sector bank and a private sector bank is.

A public sector bank is a bank in which the majority of its stake is held by the Government. In other words, we can say that a public sector bank is such a bank which has its majority of shares under the hand of the Government. The Public Sector Banks are classified into two groups as:

• Nationalized Banks
• State Bank and Associates

In the other hands, a private sector bank is a bank in which the majority of the shares of the bank are under the control of its share holders. There are currently 22 Private Sector Banks working in India.

Privatization of Public Sector Banks in India

The privatization of any institution is the process of transferring the ownership from the government to the private hands. As we all know that India has 19 Nationalized Banks which act under The Reserve Bank of India and Indian Government.

Pros of Privatization of Banks

Many Organisations in India conducted surveys and found that the privatization of the Banks will result quite positive outcomes. It led the Indian Government to think about the privatization of all the Banks. Let’s see why privatization of Indian Banks has become indispensable for the Government of India:

• It is found that the Private sector banks are more advanced than Public sector Banks and are also working more efficiently.
• The foreign investors prefer to invest in private sector banks rather than the public sector banks.
• The private sector banks are much strict against loans and frauds.
• Public Sector banks are usually less competitive than the private sector banks.
• Private sector banks are obedient and quite serious towards their work and responsibility which lacks in the most of the Public sector banks.
• The private sector banks follow the concept of lowest risk.
• Privatization will also help to reduce the burden of the Government of India.

Cons of Privatization of Banks

No doubt the private sector banks are very efficient but they also fail somewhere. Privatization of the banks leads to several undesirable situations. Some of these are:

• The privatized banks will focus on maximizing their benefit and it will put an adverse effect on the middle class and poor people of the society.
• Every organisation, whether government sector or private sector, has some issues within its structure. It is not necessary that a private sector bank will never go with any fraud.
• The people in present India mostly believe on Public Sector Banks and don’t prefer to deposit their savings in private sector Banks.
• The public sector banks usually work on social welfare while the motive of private sector banks is generation of profit.
• Many government schemes like “Jan-Dhan Yojna” and “Pension Yojna” worked well and also became successful only because they were applied in Public Sector Banks.
• Another disadvantage of privatization is the excess use of nepotism which will affect the banking services.

Impact of Privatization of Banks in India

Privatization of Banks will definitely have some positive and also some adverse effect directly on society and indirectly on economy.

Privatization of banks will be helpful in getting a better customer service. It will also affect the economy and helps in growth. It may be said that the privatization of Indian Banks will remove irregularity and bring punctuality and will led to accountability in the service. It is obviously seen that the private institutions provide incentives to the employees according to their work so Privatization of Banks will definitely increase the productivity of the employees.

One of the most adverse affect of privatization will be the widespread economic gap. It will support the rich people of the society leaving poor behind. This concept will make poor poorer. Also the Privatized banks will mainly focus on urban areas and it will slowly diminish in rural areas of the nation.

As we all know that the Banks are the backbone of the economy. The Indian Constitution says “Every economic activity in the nation should be centred at the welfare of the people” but, in my view, privatization will violate this concept because it is obvious that the Private Bank will be aimed at maximizing their own profit. Where there are some bad aspects of privatization of banks there are also some good aspects of it. We must examine on our own and decided whether Privatization of Banks should be supported or opposed.

Related Information:

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Privatization of Banks: Benefits and Concerns – Explained, pointwise

Pre-cum-Mains GS Foundation Program for UPSC 2026 | Starting from 5th Dec. 2024 Click Here for more information

• 1 Introduction
• 2 About the Ownership Trend in Banking Sector in India
• 3 What have been the benefits of nationalization of banks?
• 4 What are the arguments in favour of Privatization of Banks (NCAER Report)?
• 5 What are the challenges in Privatization of Banks?
• 6.1 Recommendations of the NCAER report
• 6.2 Recommendations of PJ Nayak Committee
• 6.3 Recommendations of Narashimham committee
• 6.4 Other Measures
• 7 Conclusion

Introduction

A report by National Council of Applied Economic Research (NCAER) has recommended  that the Union Government should privatize all Public Sector Banks (PSBs), except the State Bank of India (SBI). The Report further states that the Government ownership hinders the ability of the RBI to regulate the sector. The recommendation of complete privatization of banks has led to sharp reactions from the critics. According to them complete exit of the Government will give rise to systemic risks in the financial sector. The Union Government is aggressively pursuing the exercise of disinvestment.   For the ongoing fiscal year FY22, the Government has set a disinvestment target of Rs 1.75 lakh crore. The plan includes privatization of two public sector banks, public listing of the Life Insurance Corporation of India, Shipping Corporation of India, and many other PSUs.

About the Ownership Trend in Banking Sector in India

After the formation of Reserve Bank of India in 1935, to the period till Independence (1947), there were 900 bank failures in India. From 1947 to 1969, 665 banks failed. The depositors of all these banks lost their deposited money. T he Government nationalized 14 major banks in 1969. After this 36 banks failed but these were rescued by merging them with other government banks. This included even bigger banks like Global Trust Bank. 6 more banks were nationalized in 1980.

However, since the liberalization of the economy in 1991, the discourse on bank onwership has changed significantly. Guidelines for setting up private banks were established in 1993 and the ICICI Bank was set up in 1994. Since then the Private Banks have expanded their footprint.

Simultaneously, the approach of the Government has been to reduce its presence in the Banking Sector and reduce the number of Public Sector Banks. In 2019, after a massive consolidation exercise, the number of PSBs reduced from 28 to 12.

During the Union Budget 2020-21 presentation, the Government announced a new policy for strategic disinvestment of public sector enterprises. This policy provides a clear roadmap for disinvestment in all non-strategic and strategic sectors. The Banking Sector falls under the strategic sector. The Government  announced privatisation of two PSBs as a part of its disinvestment plan. 

What have been the benefits of nationalization of banks?

The nationalization of private banks in 1969 resulted in the penetration of banking sector in the rural areas of India. Private Banks were reluctant to open branches in rural India due to low profitability. However, nationalized banks followed the mandate of the Government and helped in financial inclusion.

The Share of Bank Branches in rural areas increased from <18% in 1969 to ~60% by 1990. This shift happened due to several initiatives by Public Sector Banks like the Lead Bank Scheme launched by the RBI in 1969.

Only after nationalization of banks could small borrowers get credit and there was a shift from class banking to mass banking .

Banks were used to bring about a revolution in agriculture and to carry out activities related to it.

The Sectoral allocation of Bank Credit underwent a change after nationalization of banks. The Share of Agriculture improved from 2.2% in 1968 to 16% in 1989. The share of credit to Industry decreased from 67.5% in 1968 to 37.5% in 1989. This shift happened due to expansion of rural branches and Priority Sector Lending norms.

The proliferation of branches created job opportunities for large section of educated youth. It also benefitted local rural economies.

There was an increased public confidence in the banking system . The growth rate of saving bank deposits witnessed a rapid rise post 1969.

42 crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening Jan Dhan Yojana accounts .

What are the arguments in favour of Privatization of Banks (NCAER Report)?

First , private banks have emerged as a credible alternative to PSBs with substantial market share.  PSBs have lost ground to private banks, both in terms of deposits and advances of loans. Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI.

Second , Government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.

At present PSBs are under the dual control of the RBI and the Department of Financial Services of the Ministry of Finance. The RBI handles the governance side of the PSBs under the RBI Act, 1934 . The Department of Financial Services maintains the regulation of PSBs under the Banking Regulation Act, 1949. Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. Privatization will provide the powers to RBI to control them effectively.

Third , barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade. These PSBs have attained lower returns on assets and equity than their private sector counterparts. The non-performing assets (NPA) of PSBs remain elevated as compared to private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.

The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds infused in such banks as of May 31, 2022.

Fourth , the under-performance of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance during this period. These initiatives include: (a) Recapitalisation of PSUs; (b) Constitution of the Bank Board Bureau to streamline and professionalize hiring and governance practices; (c)   Prompt corrective action plans ; (d) Consolidation through mergers .

Fifth , the steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in the ability of PSBs to meaningfully improve their performance.

Sixth , the current fiscal position of the Union Government is not strong enough to provide huge sums for recapitalization and keep on sustaining sick PSBs.

Seventh , the privatization of banks will have a positive impact on the economy by bringing stability at the macroeconomic level. Privatization of 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. 

The pandemic has led to the severe decline in the economic curve of the nation and has made a negative impact on banks as a whole, which makes it imperative to take all possible steps to revive the banking sector.

What are the challenges in Privatization of Banks?

First , as per the stated policy of the Reserve Bank of India, banks cannot be run by industrial houses .  However, excluding the industrial houses, there are no entities that have the required financial capability to take over any of the government banks.

Second , private banks have a long history of failures, as noted above (>1500 banks failed between 1935-1969). Recently, the RBI had to come to the rescue of Lakshmi Vilas Bank and YES Bank by pumping of capital by other entities to save these banks. Bank failures and lack of Government intervention will increase the risk in the banking system.

Third , Banks owned by the sovereign government provide more comfort level to depositors . Expansion of private sector in banking will reduce consumer confidence in the sector.

Fourth , Private banks operate with the sole aim of adding shareholder value . In contrast, the government banks also try to serve society and ensure implementation of all government programmes for the social sector. Privatization might have a negative impact on financial inclusion, agriculture credit etc.

Fifth , bank workers are opposed to privatization . as they fear loss of jobs.

What should be the approach going ahead?

Recommendations of the ncaer report.

The two banks chosen for privatization must be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years. It has recommended Indian Bank and Bank of Baroda as the two top choices for privatization. This would set an example for the success of future privatizations.

It also makes a case for corporate ownership in banks with due diligence as there is “scarcity” of potential large-scale investors in banks. The government must allow foreign investors, including foreign banks and domestic investors, as well as corporate houses to enter the auctions with due diligence

Any potential risk may be minimized by letting a consortium of corporations enter the bidding with the stake of any single corporation capped.

Recommendations of PJ Nayak Committee

Though the Government approved the Bank Board Bureau, the government has to provide enough support for proper functioning. The government can split the Chairman and Managing Director roles. Further, they should be allowed a fixed tenure of 3-5 years.

Recommendations of Narashimham committee

The Government can explore the concept of Narrow Banking. Under this weak PSBs will be allowed to place their funds only in the short term and risk-free assets. This will improve the performance of PSBs.

Other Measures

The Government must create strong recovery laws and take criminal action against wilful defaulters. The challenges in the Insolvency and Bankruptcy Code (IBC) must be addressed. This will provide a faster resolution process. In the meantime, the Government can explore alternate steps such as the concept of Bad Banks.

Privatizing all the PSBs and complete exit of the Government might have significant negative consequences. The Government must find ways to strengthen the governance of banking system and ensure safety of depositors’ money. Complete exit may not be an option, for now.

Source: Business Standard , The Hindu BusinessLine , Outlook , CNBC

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Essay on Bank Privatization – Pros and Cons

500 + words essay on bank privatization – pros and cons.

Privatization is the process by which the government transfers ownership and control of economic units to the private sector. The primary tenet of privatisation is that the competitive environment and market system compel corporations and private entities to function more efficiently. Littlechild and Beesley (1989) believe that privatisation can improve economic performance by increasing market forces, provided that at least 50% of their shares are transferred to the private sector.

Privatization is a broad and diverse phrase that refers to the process by which the private sector assumes operational or financial control of public institutions. In other words, privatisation entails the abolition of all government controls and involvement in the establishment of supply and demand mechanisms.

Banks are significant because they play a critical role in the economy. According to Levine (1997), a critical variable in the process of financial development and economic growth is the ownership structure of banks and their fundamental role in the national economy. The banking sector’s primary objective is to move financial resources into more productive and efficient initiatives that will aid future growth. The government’s job in the financial system is to ensure that banks perform this critical function efficiently through their rules and regulations. As a result of this critical role, governments in developing nations frequently hold banks.

The profit incentive is said to motivate the private sector to manage a business more efficiently. However, private corporations can exploit their dominant strength while ignoring greater social costs, say opponents. The first and most essential cause for privatisation is the weakening economy. The ongoing pandemic has significantly harmed the Indian economy, prompting the government to take such drastic disinvestment measures. The growing NPA issue has further fueled the privatisation drive. Because of their welfare state programmes and loan forgiveness, PSBs contribute the most to NPA. The government wants to reduce the NPA problem and relieve the PSBs by privatising them.

Dual control is also an issue, with the Ministry of Finance having dual jurisdiction over PSBs under the Banking Regulation Act, 1949, and the Reserve Bank Act, 1934. Instead of being autonomous like private banks, the RBI is constantly interfering with routine PSB operations. With an economic and political analysis of the decision, the privatisation of PSBs has sparked a large national debate.  Privatisation has both beneficial and negative effects on the Indian economy.

Disadvantages of Bank Privatization

Privatization plan/scheme excludes dual inspection by the Ministry of Finance and the RBI. That leaves private banks out of the purview of the Central Vigilance Commission and the Central Bureau of Investigation, which is bad for depositors.

Due to the PSBs dominance in rural areas, rural banking will be a key hurdle for privatisation. Unlike commercial banks, which have branches only in the country’s more developed or populous locations, the PSBs have branches in virtually every district. In comparison, private banks would be hard-pressed to match the PSBs’ dominance and reach across the country That said, even if private banks take over existing PSB branches in rural areas, building trust among the rural population will be tough.

Profitability is the primary concern of private sector banks. A recent example of this is YES Bank. The PSBs’ vision of a welfare state may suffer due to private banks’ profit-making objectives. The welfare state’s PSBs provide low-cost services, subsidised accounts, and other government-related initiatives. They often offer loan forgiveness and write-offs to the underprivileged populace at the behest of changing political landscapes.

By charging high service fees on banking transactions to cover operational costs, private banks may generate a difference between the rich and the poor and higher interest rates on loans, resulting in unequal income distribution

It is important to note that PSBs are backed by the sovereign, as opposed to private banks. Because of the government’s assistance, they are unlikely to fail or go extinct. A failure of a private player leaves its clients without recourse.

Advantages of Bank Privatization

There is substantial evidence that state ownership is inherently inefficient in comparison to private ownership. Numerous political and economic factors contributing to government management inefficiencies include insufficient rewards and incentives for managers and supervisors, a lack of required commitments to improve performance, and non-economic goals. Privatization of banks is one of the most significant concerns confronting most governments worldwide. Governments continue to fight divesting themselves of banks and financial systems and reducing their intervention. On the other hand, the state banking system is perilous in virtually every country that has state-owned banks. However, if the government’s objective is to foster a more efficient and market-oriented economy, it is critical to mitigate the government’s influence on credit allocation decisions.

The ever-increasing and never-ending burden of the Non-Performing Asset (NPA) problem is the most contentious topic of privatisation and its impact on the economy. It is a crucial issue to be addressed for successful and rapid economic progress. The rise in non-performing assets (NPAs) has a negative impact on the economy, in the long run, privatising PSBs will help reduce NPAs.

Capitalizing PSBs with new equity will enable them to restart lending, enhance performance, and simultaneously privatise their ownership structure. Encouraging new stock and international investment could help the debt-ridden PSBs recover.

During the epidemic, the privatisation drive will help stabilise the economy by reducing macroeconomic uncertainty. Due to market discipline, the privatisation of a few losing PSBs will force other PSBs to change their strategies. For this reason, it is more important than ever to resurrect the banking industry. This will assist the economy recover after the pandemic by allowing private investors, including foreigners, to invest in banks.

Administrative efficiency is important for a bank’s effective operation and governance. Private banks have superior administrative efficiency than PSBs. A private bank offers better overall customer service. So, privatising PSBs will improve customer service. Improving administrative efficiency and customer service will be aided by more technologically advanced items. In addition to expanding their reach in rural banking, these tech-driven offerings will help private banks provide quality service to their clients.

Privatisation also loves market competition. Less government intervention means more private-sector competition, which means higher performance and efficiency for private banks. Confronted with increased competition, private banks will develop new products that cater to specific consumer needs while minimising risks.

With better infrastructure and people, private banks will be able to achieve their target-oriented objectives.

With the sustained expansion, the Indian banking sector is one of the greatest contributors to the economy. However, the banking sector, particularly public sector banks, has been heavily impacted by the pandemic. Private players, increased capital inflows and foreign investment may help the banking sector emerge as a new age eventually leading to economic resilience. The government’s decision to privatise PSBs may help boost the economy and the sector’s growth. It will increase competition and help the debt-ridden PSBs grow.

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