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A crisis on an unprecedented scale is facing the Indian banking sector. When more facts are brought to light, the problem becomes peculiar. You can divide the Indian banking sector into two categories. There are banks in the private sector and banks in the public sector. The banks in the private sector appear to be performing well. Public sector banks, however, have become a menace. At an alarming rate, the non-performing assets in these banks are rising. As a result, a 19 billion dollar recapitalization plan has been announced by the Indian government. This plan is intended to provide some breathing space for the banks while getting their finances in order. Recapitalizing banks, however, does not appear to be working (1). 

The recent Punjab National Bank fiasco has revealed that the challenges Indian banking faces are structural. The use of cosmetic measures can not solve them. In the short term, the recapitalization of banks may prove to be a strong fix. However, it won’t be long until the same banks find themselves in the middle of another crisis. (2). Many critics have suggested that bank privatization is the only way to transform India’s public sector banks into commercially viable entities. They think that bankers should run public sector financial institutions and that the mental state of the average Indian is not rooted in bureaucrats.

Earlier, the Indian banking sector was in private hands. During the 1970s, however, the Indian government thought that banks favored the rich and that access to cheap credit must also be given to the poor. Several banks have been nationalized under this view. It is a huge irony that today, the nationalized banks based on the pro-poor agenda face increasing losses because, without proper diligence (3), they have loaned out huge sums of money to the rich. India’s current Prime Minister, Mr. Narendra Modi, firmly believes that the government’s job is to govern. He also believes that in any other company, the government has no business meddling.

That does not seem to have prompted him to privatize the twenty-one banks of the public sector today under the government’s control. Over 70 percent of all credit creation in India comes from these banks. Also, since these banks do not ration their loans according to the market mechanism, gross malinvestments are caused by government meddling. In simple words, these banks are financing poor projects with questionable return rates because political links and corruption govern the system.

Are there any benefits to Privatization?

Privatization of the bank is likely to provide a lot of different advantages. In India, private sector banks are already much more advanced than banks in the public sector. Even though nationalized banks have a large base of depositors, they always play a catch-up game. Over the years, this situation is likely to worsen. This is because foreign investment in private sector banks is now permitted as well. It is therefore probable that foreign banks will acquire stakes in some of these banks. They will also implement, in Indian banks, some of the operational efficiency that foreign banks are known for. Private sector banks, on the other hand, are reeling from loan fraud and so on. (4). 

We see multiple banks getting scammed, failing, and eventually intervening to rescue RBI and the government. Such cases have occurred way too many times to recall them all. After viewing public banks with unease to take action, many economists have suggested to the government. (5) Now, the government is in talks to privatize banks in the sector. Banks play a very significant role and are one of our economy’s key driving forces. Most of us are already accustomed to receiving deposits and providing people with loans for their basic functions. But banks in India have evolved over the years to perform functions such as lockers, insurance, mutual funds, transfer of funds.

Although public or private banks perform the same functions, customers notice significant differences depending on their choice because of their goals and existence duration. Thanks to the reforms introduced in 1991, private banks arrived relatively late in the Indian banking sector. (6) This is one reason why individuals find public banks secure, as they have been around for longer to allow them to gain their trust. Also, adding to this security is the confidence that the government will not let a public bank fail. Through their technological advancements and superior customer service, private banks make up for these security concerns. 

The reality is that these banks aren’t competitive. Banking industry experts are bewildered by the inefficiency exhibited at the Punjab National Bank (7). How is it that a business person could defraud the bank of 1.8 billion dollars with the connivance of a few junior-level bank officials? In banks such as Citibank and J.P. Morgan, this sort of incident is never reported, even though they operate in several nations and have more complex operations. Bank privatization will ensure that banks benefit from the standards of compliance and risk mitigation processes followed by these banks.

A History behind the Proposal

Private commercial banks have dominated the banking industry after Independence. The government soon realized that this caused banks to leave out a significant portion of the population. The poor were included in this section, as the banks catered primarily to the rich. This prompted the government to take steps after Independence to nationalize India’s 14 major banks in 1969. eight more financial institutions were added to the roster by 1980. This allowed citizens, irrespective of income levels, to bank services throughout the nation’s length and breadth. The numbers have continued to increase, but we now have 12 public banks operating in the nation after a list of mergers and acquisitions in the last few years.

Public banks have failed in many respects, despite being effectively accessible to the population. According to the RBI, public sector banks accounted for over 90 percent of the 5.5 lakh crore gross NPAs (8) as of March 2016. The interest and principal referred to by NPA is due for a prolonged period, and its recovery is not expected or doubtful. As of March 2017, RBI data showed that 9.3 percent of private sector banks were stressed in the industry loan book, compared to 28.8 percent for PSBs. As a result, a 19 billion dollar recapitalization plan has been announced by the Indian government. This recapitalization may help the banks survive, but it is not a solution in the long term.

This has led to the government considering Privatization as a means to turn banks into commercially viable entities. Niti Aayog made recommendations to the central government on the Privatization of a few Indian public sector banks.

Privatization refers to the selling to the private sector of government-held assets or shares. It is often achieved through the listing on the stock market of a new private company. This has been done in other sectors before. Most private banks are, to a large extent, profitable. Many PSUs do not make profits. The government believes that the Privatization of PSU banks can transform them from loss-making to profiting ventures.

Modi’s proposal for PSU privatization

Prime Minister Narendra Modi said that the government has no business in business on Wednesday in a clear move for underinvestment and privatizing public sector undertakings. The PM made the comments during the Department of Investment and Public Asset Management’s webinar on Privatization. “It is the responsibility of the government to support businesses and organizations. But it is not important that businesses are owned and operated,” said PM Modi. “There was still a different time when public sector businesses were formed, and the needs also were different,” he went on to add (9). 

Speaking about the 2021-2022 Budget, the Prime Minister said that the Centre’s fiscal plan provided a clear roadmap to take India on a high growth trajectory. “There is always room to change the policy that was successful 50-60 years ago. Now, when we bring about reform, our goal is to make optimal use of public money, “And he added. PM Modi continued to say, “Just because they have been operational for so long, we can not continue with public entities. The policy focus ought to be on society’s welfare and people-related initiatives. It sounds like misusing our officers’ talent to keep them in the public entities’ business operations.” (10). 

Mapping the Center’s plan to privatize all PSUs, except four strategic sectors, the Prime Minister said that his government had decided to monetize Rs 2.5 lakh crore worth of 100 such entities. “Our emphasis is to monetize and then modernize. The private sector is bringing modern technology, a change in management mindset, and creating more effective jobs. This can increase system efficiency, “During the webinar, PM Narendra Modi stated. He adds that this monetization will be used to improve rural connectivity, provide safe drinking water, and make cheap housing provisions.

Sectors under the move

They involve Fortune 500 companies, including the Indian Oil Corporation (IOC) petroleum refiner and retailer and the ONGC national oil explorer and SAIL steel maker. It also involves the aircraft manufacturer Hindustan Aeronautics Ltd (HAL), which produces Indian Air Force fighter planes, and Mazagaon Docks, which produces Navy warships and submarines. The government has clearly stated that it will not prevent the private sector from establishing companies and trying to operate freely in the 18 strategic sectors in which PSU control will be retained (11). 

Under the Ministry of Finance Ministry, which moved a proposal seeking cabinet approval for this new PSU policy, the Department of Investment and Public Asset Management has divided the 18 strategic sectors under three heads: Mining and Exploration, Manufacturing, Processing and Generation, and Services. The government will retain control of one or more existing PSUs in the coal, crude oil and gas, and mineral and metals industries in the mining and exploration sector. The government continues to run companies in the defense equipment, steel, petroleum refinery and marketing, fertilizers, power generation, atomic energy, and shipbuilding sectors for manufacturing, processing, and generation.

The new policy will not apply to government-controlled autonomous bodies, regulatory authorities, and refinancing institutions, a senior government official explained. This policy’s scope will not be PSUs that provide support and funding for vulnerable groups such as Scheduled Castes and Scheduled Tribes, minority communities, and backward classes. Security printing activities, minting, and organizations involved in commercial activities with a mandate to develop, such as railways and posts and telegraphs, will also remain outside the scope of the new policy of the public sector (12). 

This might rank as the world’s most serious attempt at Privatization, depending on how the market prices these assets at the time of sale. It will open up massive opportunities for deep-seated investors from friendly countries – hedge funds, private equity firms, pension funds, sovereign wealth funds, high net worth family offices, and other large-investment vehicles – to buy into the growth story of India and increase India’s economic and financial links with the rest of the free world.

My passion is Reading and writing. Basically, an optimistic introvert. Always striving to be better. Writing as a passion leads me to become stronger and focused.