Privatization of Nationalized Banks

Banks play a very important role and are one of the key driving forces in our country. Most of us are already accustomed to their basic functions of receiving deposits and providing loans to people. But over the years banks in India evolved to perform functions like providing lockers, insurance, mutual funds, transferring funds and also play a key role for digital payments and transfers. They also aid the growth of the country by absorbing the excess capital from the economy and redirecting its use towards production and growth. However, every year we see multiple banks getting scammed, failing and eventually RBI and government intervening for its rescue. These instances have happened ways too many times to recall all of them. Many economists have suggested the government after viewing public banks with unease to take action and now the government is in talks to privatizebanking sector. According to a report in the Economic Times, government’s think tank, Niti Aayog has kept six public sector banks (PSBs) that were part of the last round of consolidation and State Bank of India out of privatization plan. The other five PSBs are Punjab National Bank, Union of Bank, Canara Bank, Indian Bank, and Bank of Baroda. Banking is one of the strategic sectors under the new framework put up by the government. Under the policy, the government would have limited number of state-owned entities in strategic sectors.
Privatization of nationalized banks being touted as a one-step solution to the evils of NPAs, bad loans and other inefficiencies in the banking sector. However this debate is typically one-sided and does not do justice to this complex issue. A good solution to any problem requires first and foremost that the problem is thoroughly analyzed and the root causes are identified. But the shrill voices that demand privatization of nationalized banks do not explain what the root causes of the current round of banking sector problems are. They also do not even attempt to explain how privatization would put an end to those problems. Many of these voices also recommend that the Chairperson of nationalized bank should be someone picked from the private sector. It is claimed that this too would be able to resolve the problems that nationalized bank face. However in the case of Air India, a similar move (of bringing someone from the private sector to head the airlines) has not yielded desired result and has not succeeded in turning around the airlines and making it profitable. It is generally claimed that Air India suffers from a multitude of problems- as a government owned entity. It is required to operate many unprofitable flights in order to meet the government’s social obligations: there is political interference in its functioning; workers unions exploit the airlines; many workers especially at lower levels are grossly overpaid and are far less productive than their private sector counterparts. Now it is easy to see that these problems are systemic issues and merely bringing in one person at the top cannot resolve these issues. Even if the airline is privatized, it may still be subjected to political interference and workers unions’ related issues. Similarly, in the case of nationalized banks, there is a multitude issues that these bank face. First they are required to operate many unprofitable branches in rural and semi-urban areas in order to meet the government’s target of making banking more accessible to people. Then, they have to content with priority sector lending regulations and welfare oriented lending regulations. In fact some of the largest bad loans come from priority sector lending. Workers unions and overpaid junior level staff (especially when compared to private sector) are a reality for the nationalized banks as well. These are systemic issues and need long-term solutions. A knee-jerk reactionary privatization is not going to resolve these problems. Another point that private sector banks too suffer from many problems. The central Bank, RBI has often upbraided many private sector banks for not following norms properly. On many occasions even fines and penalties have been imposed on these banks. In fact nationalized banks have a far better track record than private sector banks in this regards. Thus it would be presumptuous to say that merely privatizing nationalized banks will make them more efficient and profitable. What is needed is a more thoughtful approach. First and foremost, private sector banks should be given the freedom to hire and fire workers, especially at lower levels. Individual banks should be given the freedom to fix salaries at market rates rather than follow universal government mandated rates. Secondly, priority sector lending and welfare based lending should be handled by specialized and dedicated institutions rather than by commercial banks. These are the changes that the Indian banking sector and economy in general desperately need.
All India Nationalized Banks Officers Federation (AINBOF) has opposed privatization of Public Sector Banks as it will lead to increase in service charges and will take banking beyond the reach of common man. In a statement, AINBOF said, privatization will primarily impact the general public onlyas the social objective will be lost in the name of profitability. Service charge will be increased and customers who are able to bear those charges only will be serviced. This will take banking beyond the reach of common man which was the primary objective of nationalization, it said. It said, though the government’s agenda of privatization started way back in 1991 immediately after liberalization, the trade unions were successful in thwarting the ill-conceived moves of successive governments over the past three decades and maintaining the public sector status. Often many private sector banks that came into existence , today only a handful which are promoted by the financial houses like ICICI, UTI,IDBI, HDFC are surviving and many of the private sector entities that commenced their banking operations after 1990 were either closed or merged. Former RBI Governor Raghuram Rajan also viewed that privatization alone won’t solve the problems of banking sector and even private lenders are not immune to the problem of bad assets in a slowing economy.