Why privatise banks?

S Kalyanasundaram | Updated on: Apr 13, 2022

Cropped hand of a woman checking account with calculator and holding a pen. Indian currency notes and coins are on the side of table. Concept of home finance management and economy. istock photo for BL istock photo for BL | Photo Credit: SB Stock

Wholesale privatisation is dangerous as public money is involved

While analysing the results of election to five State Assemblies, some analysts concluded that the results have empowered the BJP to go ahead with economic reform more forcefully. Well-known economist Arvind Panagariya, in an article in a leading newspaper, has advocated that the government must accelerate privatisation of public sector enterprises and begin the process of privatisation of public sector banks. This is not only ill-conceived but also impractical. Bank workers are opposing privatisation and they are planning agitations, including strikes.

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

The market cap of State Bank of India is $54.78 billion as on March 2022., and Bank of Baroda’s $7.04 billion. The market cap of all government banks is so huge that it will be difficult to find buyers for them. Even for the stated privatisation of two government banks in the near future, there may not be any takers.

It is a misconception to treat banks with other manufacturing or service industries. Banks are predominantly run using public funds by way of deposits; shareholders’ capital is generally small. To prevent banks from taking undue business risks using public money, there are checks and balances like Statutory Liquidity Reserve Ratio and Cash Reserve Ratio. These apart, they have to adhere to various regulations regarding credit dispensation like group exposure limits, income recognition norms, provision for bad debts, etc. Hence wholesale privatisation is not only undesirable but also dangerous as the public money is involved.

We have a long history of private bank failures. After the formation of Reserve Bank of India in 1935 and 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 money.

After nationalisation of banks in 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, 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. There were also many cooperative bank closures, and the strength of town cooperative banks have shrunk from 1,926 in 2004 to 1,551 in 2018.

Banks owned by sovereign government provides tremendous comfort level to depositors. The common man feels that a government bank cannot fail and his money is safe. Disturbing this structure will, therefore, be dangerous.

Over the years, government banks have contributed to the economic growth of the common man. Only after nationalisation of banks could small borrowers get credit and there was a shift from class banking to mass banking. 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. Forty-two crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening Jan Dhan Yojana account, a recent government initiative.

Comparing government banks with private banks is like comparing oranges and apples. Private banks operate with the sole aim of adding shareholder value whereas government banks also try to serve society and ensure implementation of all government programmes for the social sector. Performance should not be measured simply based on profitability or business handled but with the contribution to society, direct as well as indirect.

The government must ensure better supervisory mechanism of banks instead of attempting wholesale privatisation.

The writer is a retired banker

Published on April 13, 2022
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