Large-scale privatisation of banks will hurt

S Kalyanasundaram | Updated on September 12, 2021

Govt-owned banks not only provide tremendous comfort level to depositors but also render services at affordable cost

It has been reported that while addressing the NCAER-organised India Policy Forum 2021, the Finance Secretary, TV Somanathan, said that the government continues to work on its stated position that most of the public sector banks will be eventually privatised.

“Banking will be one of the sectors where a bare minimum of the public sector will remain. This is the government’s stated policy”, he said.

In fact, he was responding to a suggestion by Montek Singh Ahluwalia that the government must now focus on getting the banking sector reforms done. Ahluwalia was a key member of the erstwhile Congress-led UPA government. He said that the difficult part of putting the public sector banking system competitively on a par with the private sector banking system was not done as yet.

This is quite contrary to what the Finance Minister said sometime in March this year.

When the bank employees were striking work, objecting to her proposal to privatise two banks, she said that not all banks are going to be privatised, adding that the interests of the employees will be taken care of. She further clarified as follows: “We have announced a Public Enterprise Policy, where we have identified four areas where public sector presence will be there, in this, the financial sector too is there. Not all banks are going to be privatised,” she said.

The path suggested by the government seems to be a dangerous one. Privatising one or two banks, due to various reasons, is quite different from privatising a major chunk of public sector banks. One fails to understand the need for such an approach at the present juncture.

Already we have substantial presence of new generation private sector banks which are giving enough competition to the government banks.

Non-performing assets

The major problem faced by banks is on account of non-performing assets, which is common for both the private and public sector banks.

The government may also have difficulty in providing additional capital to the government banks on account of fiscal constraint and the banks are in need of additional capital to maintain Capital Adequacy Ratio for continuing their lending operations. But getting rid of public sector banks on account of such problems is akin to throwing the baby out with the bathwater.

Banking is not like any other business entity. Banks operate with a small portion of shareholders’ funds with a disproportionately higher outlay of common man’s deposit. Banks basically lend depositors’ money.

Any failure of banks will have a tremendous contagion effect and will derail the economy. We should not forget the historical factors that had led to bank nationalisation in 1969.

After the formation of Reserve Bank of India in 1935, up to the period of our getting Independence (1947) there were 900 bank failures in our country. From 1947 to 1969, 665 banks failed.

The depositors of all these banks lost their deposited money. Even after 1969, 36 banks failed but these were rescued by merging them with other government banks.

This included even bigger bank like Global Trust Bank. Recently, we have seen the failure of old generation Lakshmi Vilas Bank and new generation YES Bank.

Comfort factor

The 1,926 town cooperative banks in 2004 have shrunk to 1,551 in 2018, as per an RBI report. Banks owned by sovereign government provides tremendous comfort level to depositors. In his subconscious mind the common man feels that a government bank cannot fail and his money is safe.

Attempting to privatise all banks is simply undermining the tremendous contribution of these banks to the country over the years. The nationalisation of private banks in 1969 resulted in the opening of tens of thousands of branches in remote corners of the country. Job opportunities were created for a large section of educated youth. Banks were used to bring about a revolution in agriculture and to carry out activities related to it. Bank loans were available to the weaker sections and small entrepreneurs.

Banks have become an excellent tool for the economic progress of the country.

Forty-two crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening the Prime Minister Jan Dhan Yojana account, a recent government initiative.

There are also private banks in the current system. But they often operate for profit only. But state-owned banks, while trying to be profitable on the one hand, provide many services in public interest. Only government banks provide services to the common people at affordable cost.

Privatising all of them will be disastrous. The government must find ways and means to strengthen the banking system and ensure safety of depositors’ money and forbid looting of public money by private tycoons.

Public deposits must be well protected and not allowed to be plundered by anyone.

The writer is a retired banker

Published on September 12, 2021

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