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One of the key pending reforms in India is Privatization of Public sector banks (PSBs). However, the authors of an essay in the most recent RBI bulletin cautioned against big-bang privatization of PSBs, urging the government of India to follow a more measured and nuanced approach.
“Against the backdrop of these findings (on the role of PSBs), a big bang approach of privatization of these banks may do more harm than good,” Snehal S. and others wrote in the article. Many mergers have been seen in the recent years and the government has already announced its intention to privatize two banks.
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According to the authors of the article, public sector banks have done better at increasing financial inclusion whereas private sector banks (PVBs) are more effective at maximizing profits.
Privatization is not a new concept
“Privatization is not a new concept, the buzz around privatization is going on since 90’s and and not only India but countries all over the world have either went to reduced participation or have withdrawn completely from a range of activities in the last four decades. The thought process behind this is “Government has no business to be in the business”.
The pros and cons of Privatization are well known. From the conventional perspective that privatization 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 cautioned.
According to them, the government’s gradual privatization strategy could prevent a gap from developing in the societal goal of monetary transmission and financial inclusion.
Since PSB lending patterns are less pro-cyclical than those of private banks, they aid in the development of counter-cyclical monetary policy. Even if the private sector has been more effective at profit maximisation, PSBs have a better track record than their peers in the area of financial inclusion, according to the article.
They noted that evidence revealed that, in contrast to private sector banks, public sector banks were not just driven by the goal of profit maximisation and had included the desirable financial inclusion goals into their objective function.
According to the paper, PSBs have improved the transmission of monetary policy, which has helped countercyclical monetary policy initiatives take off.
Recent mergers of PSBs led to industry consolidation.
“During the last easing cycle, for example, their reduction in lending rates was substantially higher than that of PVBs. At the same time, their deposit rates were relatively stickier,” the paper further stated.
Recent massive mergers of PSBs have led to industry consolidation, generating stronger, more resilient, and more competitive banks.
By 2020, there were only 12 PSBs when the government combined 10 nationalised banks into four sizable institutions. In 2017, there were 27 state-run lenders.
With Punjab National Bank, United Bank of India and Oriental Bank of Commerce merged; Canara Bank and Syndicate Bank merged; Indian Bank and Allahabad Bank merged, and Andhra Bank and Corporation Bank merged with Union Bank of India.
State-owned lenders effective in social welfare model.
The authors used mathematical models to examine the efficiency levels of Indian banks between 2010 and 2022. The findings imply that PVB efficiency has consistently outperformed that of their public sector competitors when profit maximisation is the only motivation. State-owned lenders, however, seem to be more effective than PVBs when the objective function is adjusted to include financial inclusion, such as total branches, agricultural loans, and priority sector advances, it claimed.
It is important to know that using data development analysis (DEA) it is understood that:
- PVBs (private sector banks) are more efficient in profit maximization, public sector banks have done better in promoting financial inclusion. PSBs account for the highest share of bank branches in rural areas, followed by semi-urban areas.
- Also, the manpower cost efficiency of PSBs is higher that PVBs.
- Lending of PSBs is less procyclical than PVBs.
The central bank noted the views expressed in the article were of the authors and do not represent that of the Reserve Bank of India (RBI).
Copy of paper can be downloaded from here:
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