Big bang privatisation of banks can be harmful: RBI article

‘State-owned lenders have eye not only on profit, but financial inclusion too; balance sheets suggest they also weathered COVID storm well’

August 18, 2022 07:41 pm | Updated 07:41 pm IST - Mumbai

Big-bang privatisation of public sector banks can do more harm than good, authors of an article in the latest RBI bulletin have warned, asking the government to take a nuanced approach on the issue.

While private sector banks (PVBs) are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion, they said in the article.

"Privatisation is not a new concept, and its pros and cons are well known. From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it," they said.

The gradual approach to privatisation adopted by the government could ensure that a void was not created in fulfilling the social objective of financial inclusion and monetary transmission, they said.

Quoting various studies, the authors said, PSBs (Public Sector Banks) had played a key role in catalysing financial investments in low-carbon industries, thereby promoting green transition in countries such as Brazil, China, Germany, Japan, and in the European Union.

Evidence suggested that public sector banks were not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks, they pointed out.

"Our results also point out the countercyclical role of PSB lending. In the recent years, these banks have also gained greater market confidence. Despite the criticism of weak balance sheets, data suggests that they weathered the COVID-19 pandemic shock remarkably well."

Recent mega mergers of PSBs have resulted in consolidation of the sector, creating stronger and more robust and competitive banks.

In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12. There were 27 state-run lenders in 2017.

United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank; Syndicate Bank was amalgamated with Canara Bank; Allahabad Bank was amalgamated with Indian Bank; and Andhra Bank and Corporation Bank were consolidated with Union Bank of India.

In a first three-way merger, Dena Bank and Vijaya Bank were merged with Bank of Baroda in 2019.

Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India.

The authors also pointed out that the establishment of the National Asset Reconstruction Company Limited (NARCL) would help in cleaning up the legacy burden of bad loans from their balance sheets.

The recently constituted National Bank for Financing Infrastructure and Development (NABFiD) would provide an alternative channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs.

Overall, they said, these reforms were likely to help strengthen PSBs further.

Against the backdrop of these findings, a big bang approach of privatisation of these banks may do more harm than good. The government has already announced its intention to privatise two banks.

The central bank said the views expressed in the article were of the authors and do not represent that of Reserve Bank of India (RBI).

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