A big bang approach of privatisation of public sector banks (PSBs) may do more harm than good, cautioned an article in the Reserve Bank of India’s latest monthly bulletin.

Referring to the government’s intention to privatise two banks, the authors of the article said: “Such a gradual approach would ensure that large scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission.”

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“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,” said RBI officials - Snehal S. Herwadkar, Sonali Goel and Rishuka Bansal, in the article ‘Privatisation of Public Sector Banks: An Alternate Perspective’.

Financial inclusion

The authors noted that public sector banks are 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 (PVBs).

“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,” opined the officials.

Recent mega merger of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks, they added.

Easing bad loan burden

“Establishment of National Asset Reconstruction Company Limited (NARCL) will 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) will provide an alternative channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs. Overall, these reforms are likely to help strengthen the PSBs further,” the officials said.

Analysis by the officials showed that PSBs’ labour cost efficiency remained higher than PVBs for most of the years except 2016. This implies that incurring lower cost on labour, the PSBs can generate higher level of output.

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