Privatisation of Banks


    In Context

    • Recently, the Bank unions had done a nationwide strike against the proposed privatisation of public sector banks (PSBs).


    • The government has planned to lay the Banking Laws (Amendment) Bill, 2021 during the Winter Parliament session.
    • Earlier, the government passed a bill that will allow the privatisation of state-owned general insurance companies, through the General Insurance Business (Nationalisation) Amendment Bill, 2021.

    Banking Laws (Amendment) Bill, 2021

    • The Bill aims to amend banking companies acquisition and transfer laws of 1970 and 1980 and the Banking Regulation Act, 1949 to achieve privatisation of two PSBs to meet disinvestment targets as stated by finance minister Nirmala Sitharaman in the Union Budget 2021-22. 
      • The Central Bank of India and Indian Overseas Bank can be 2 candidates for the bank privatization move.
    • This will bring down the minimum government holding in the PSBs from 51% to 26%.

    Evolution Of Banking In India

    • About:
      • The Indian banking system consists of commercial banks, which may be public scheduled or non-scheduled, private, regional, rural and cooperative banks.
    • Phase 1: The Pre-Independence Phase
      • The first bank to be established as the Bank of Hindustan was founded in 1770 in Calcutta. It closed down in 1832. 
      • The Oudh Commercial Bank was India’s first commercial bank in the history of the evolution of banking in India.
      • In the 19th century, banks such as Allahabad Bank (Est. 1865) and Punjab National Bank (Est. 1894) were established.
      • Bank of Bengal, Bank of Madras, and Bank of Bombay – established in the early to mid-1800s – were merged as one to become the Imperial Bank, which later became the State Bank of India.
    • Phase 2: The Post-Independence Phase
      • In 1969, the Government of India decided to nationalise the banks under the Banking Regulation Act, 1949. A total of 14 banks were nationalised.
      • State Bank of India had been nationalized in 1955.
      • Between 1982 and 1990, new banks were created were:
        • NABARD (1982) – to support agricultural activities
        • EXIM (1982) – to promote export and import
        • National Housing Board – to finance housing projects
        • SIDBI –  to fund small-scale industries
    • Phase 3: The LPG Era (1991 Till Date)
    • The government invited private investors to invest in India. Ten private banks were approved by the RBI. 
    • A few prominent names which exist even today from this liberalisation are HDFC, Axis Bank, ICICI, DCB and IndusInd Bank.

    Why Banks Were Nationalised in India?

    • To Energise Priority Sectors
    • Nationalisation came with a pledge to support the agricultural sector.
    • Maximum coverage of banks throughout the country.
    • Mobilisation of Savings
    • Economic and Political Factors ( Burdern due to two wars in 1962 and 1965)

    Drawbacks of Nationalisation

    • Socio-Economic Challenges: The banks couldn’t provide sufficient support to eradicate poverty or provide adequate financing to the grassroots levels of society.
    • Competition From Private Banks: Public sector banks were never able to surpass private banks in performance.
    • Failure to Achieve Financial Inclusion: It was only achieved to a limited extent after the launch of a government campaign called Jan Dhan Yojana.

    What is Privatisation?

    • Transfer of ownership, property or business from the government to the Private sector.
    • It is considered to bring more efficiency and objectivity to the company, something that a government company is not concerned about.
    • Following the industrial policy of 1991, the government has adopted disinvestment, strategic sale of minority shares to private partners and selling of loss making units to the private sector.

    Need for Privatisation

    • Aggravated high Non-Performing Assets (NPAs) and stressed assets amidst pandemic.
    • To strengthen the strong banks and also minimise their numbers through privatisation to reduce its burden of support.
    • Less effective bank mergers & infuse better management policies.
    • No political interference & prompt decision making.
    • More profitability & accountability to shareholders.
    • Improves inflow of Foreign Direct Investment (FDI) or investment.
    • Recommended by Narasimham Committee (proposed 33% govt. stakes), P J Nayak Committee (), RBI Working Group, etc.
    • Better use of technology by private banks.

    Arguments Against

    • Performance Concerns (Lakshmi Vilas Bank’s operational issues, ICICI bank’s dubious loans sanctions, Yes Bank case etc.)
    • This move will result in financial exclusion and promote crony capitalism.
    • This will remove the sovereign guarantee behind the PSB deposits and make household savings less secure.
    • Under Reporting of NPAs– 2015 Asset Quality Review by RBI.
    • Concerns of successful disinvestment.
    • Defeats goal of financial inclusion (failed Priority Lending Targets).
    • Non-sharing of government’s social responsibilities (Violation of DPSP under Article 38).
      • Privatisation will shrink employment opportunities for Scheduled Castes, Scheduled Tribes and Other Backward Classes (OBC) since the private sector does not follow reservation policies for the weaker sections.

    Way Forward

    • Privatise only non-functioning PSBs.
    • Strengthen RBI’s regulation over PSBs.
    • Implement Kotak committee recommendation of corporate governance
    • Conversion of PSBs into corporations like Life Insurance Corporation (LIC).
    • Improve NPA recovery, reduce loan defaults and introduce greater transparency in credit allocation.

    Source: HT