Bank Privatization a step in the right direction?

Banks are an important backbone of economy of any country. They are the one who can provide required credit to the industry so that the industries can prosper and at the same time the nation also prospers. But during the sixties and seventies India was grappled with the problem of bank run, bank run is a scenario where the common public queues to remove their entire savings from the bank. Bank run is a terrible situation that any bank want to be in. Now the question arises why this situation occurs in the first place. And the answer is pretty simple i.e. people no more trust the bank with their money.

During the time till 1969 i.e. before the nationalization of the bank took place the banking sector faced many frauds and corruptions this can be seen through the number of banks that closed in the recent decades before 1969 there used to be more that 550+ banks during that time and over 100 closed during the seventies. Since bank are important to any economy as already mentioned then Prime Minister Smt. Indira Gandhi had to intervene to restore the trust of people in the banks.

The only way to store the confidence among the common public was to put in place a trusted owner of the bank and during that time it was only the government whom people could trust and hence Prime Minister took a decision to nationalize the bank and government become the major stakeholder in the banks. This helped to arrest the bank runs and somewhat restore the confidence of people in the banks. Fast forward to 1991 the period when India adopted LPG, not the gas cylinder just kidding ;) it’s the Liberalization, Privatisation and Globalisation it was done because of the balance of payment crisis and IMF refused to bailout India until proper reforms were carried out. We will discuss this story on some other day. But yes this LPG reform gave a private player a leeway to own and run banks in India of course under strict regulations and guidelines.

The private bank excelled and some banks become too big to fail like HDFC Bank and ICICI Bank and at the same time public banks were grappled with various issues to name a few is the NPA crisis. NPA (Non-Performing Assets) occurs when the entity to which the loan is given has failed to meet the payment obligations. The NPA is on a higher side for the public sector banks as compared to their private counterparts. The Public sectors banks have been facing the liquidity crisis for many years and Government has induced money in them so that they could continue to perform. This method of inducing money in the PSB is called as the recapitalization of banks. The government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. All this is mostly at the expense of taxpayers' money.

But why to “bail” the PSB that might be a question that you all will have, the reason is straightforward these PSB mostly have branches where private player presence are limited i.e. in the rural areas where the banking penetration is low, they serve the underserved section of society but I believe that after the Jan-Dhan revolution and the mobile data revolution that has taken the country by storm there is no need to have these many public banks and guess what currently the government do think on the similar lines and have taken a bold step by announcing the privatization of two PSU banks, which two PSU they are going to be that’s a question but government has shortlisted 4 of them. Namely Bank of Maharashtra, Bank of India, Central Bank of India and Indian Overseas Bank. And just after this announcement the share price of these banks has increased 20 percent on two consecutive days that an increase of 44 percent now even though government don’t privatize then but just sell their stake they can make money, just kidding!!

Why there is an increase in NPA of public banks one reason is the concept which I called as 'phone pe loan'; since the government is the owner of these banks there have been cases that the bank managers are compelled to give loans due to the pressure from an influential person and they dont follow due diligence in that case. The other possible reason is the RBI cannot effectively govern them as compared to the private banks since the owner is the government however recently we have seen Prompt Corrective Actions taken by the RBI on some government banks. Also these government banks are almost zero on the front of innovation as compared to their private counterparts the reason which can be attributed to it is the structure on this banks the management is fearful of anything going wrong as they will be held accountable for it and hence refrain from taking any innovative step. In order to avoid this government can step in and overhaul the structure of banks and should start rewarding the innovations in banks at the same time should avoid taking any penalizing action if anything goes wrong. Also the management of these banks should have skin in the game i.e. their pay should be linked to the performance of the bank due to which there will be a high chance that will carry out their work in the best interest of bank. These can be some steps which government can take if they dont wish to privatise the banks.

Who will bid for these banks, are the term going to be rigid as we had seen in Air India due to which Air India Sale never took off or will the term be favorable only time can throw light on this but it is for sure that this move will shake up the banking sector based on how the privatization will take form?