{"id":13844,"date":"2021-02-13T00:00:00","date_gmt":"2021-02-13T00:00:00","guid":{"rendered":"https:\/\/www.nextias.com\/current_affairs\/uncategorized\/13-02-2021\/privatisation-of-banks-proposal-need-and-concerns\/"},"modified":"2021-02-13T00:00:00","modified_gmt":"2021-02-13T00:00:00","slug":"privatisation-of-banks-proposal-need-and-concerns","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/13-02-2021\/privatisation-of-banks-proposal-need-and-concerns","title":{"rendered":"Privatisation of Banks: Proposal, Need and Concerns"},"content":{"rendered":"<p><strong>In News<\/strong>: Union Budget has proposed privatisation of two banks in addition to IDBI Bank and General Insurance company.<\/p>\n<ul>\n<li>It may give the private sector a key role in the banking landscape after 51 years of nationalisation in 1969.<\/li>\n<li>Currently, there are ten nationalised banks in addition to IDBI Bank and SBI.<\/li>\n<\/ul>\n<p><strong>Reasons behind the proposal<\/strong><\/p>\n<ul>\n<li><strong>Bare Minimum Presence<\/strong>: Government wants to minimise its presence in different sectors where private industry is relatively more competent.\n<ul>\n<li>This market-led approach also reflects in the <strong>creation of Asset Reconstruction Company<\/strong> for solving financial crunch.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Huge losses<\/strong>: Even after years of capital infusion and governance reforms, the health of the public banks have not changed significantly.\n<ul>\n<li>Public banks lag on profitability, market capitalisation and dividend payment record.<\/li>\n<li>The Government infused Rs 80,000 crore in 2017-18 and Rs 1.06 lakh crore in 2018-19 in public banks through <strong>recapitalisation bonds<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Bank Mergers were less effective: <\/strong>In 2019, 10 banks were merged in 4 which didn\u2019t change the scenario too much. This privatisation drive will compliment those reforms.<\/li>\n<li><strong>Increasing Private Bank\u2019s Market Share and Competitiveness<\/strong>\n<ul>\n<li><strong>Private banks\u2019 market share in loans has risen to 36% in 2020<\/strong> from 21.26% in 2015, while public sector banks\u2019 share has fallen to 59.8% from 74.28%.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><img decoding=\"async\" src=\"https:\/\/cfstatic.nextias.com\/cdn-cgi\/image\/format=auto\/file_library\/mix_content\/367992744260162600_image.png\" style=\"height:293px; width:455px\" \/><\/p>\n<ul>\n<li>\n<ul>\n<li>Competition heated up after the RBI allowed more private banks since the 1990s.<\/li>\n<li>They have expanded the market share through new products, technology, and better services, and also attracted better valuations in stock markets. Eg.\n<ul>\n<li><strong>HDFC Bank (set up in 1994)<\/strong> has a <strong>market capitalisation of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li>India has 22 private banks and 10 small finance banks.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Many Committees and Working Groups<\/strong> have proposed privatisation. Few Examples\n<ul>\n<li><strong>Narasimham Committee:<\/strong> Proposed bringing down the government stake to 33%.<\/li>\n<li><strong>P J Nayak Committee:<\/strong> suggested reducing Government stake below 50%.<\/li>\n<li><strong>RBI Working Group<\/strong> recently suggested the entry of business houses into the banking sector.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Issues plaguing PSU Banks<\/strong><\/p>\n<ul>\n<li>High non-performing assets (NPAs) and stressed assets.<\/li>\n<li>After Covid regulatory relaxations are eased, NPAs and loans losses are expected to soar.<\/li>\n<li>As per RBI\u2019s recent <strong>Financial Stability Report<\/strong>, Gross NPA ratio of Public Sector banks may increase significantly.<\/li>\n<\/ul>\n<p><img decoding=\"async\" src=\"https:\/\/cfstatic.nextias.com\/cdn-cgi\/image\/format=auto\/file_library\/mix_content\/70474051742131640_image.png\" style=\"height:289px; width:481px\" \/><\/p>\n<p><strong>Nationalisation in Past<\/strong><\/p>\n<p>Then-Prime Minister Indira Gandhi, who was also Finance Minister, decided to nationalise the 14 largest private banks on July 19, 1969. The prime reasons were<\/p>\n<ul>\n<li><strong>Socialist Goals: <\/strong>The nationalisation aligned the banking sector with the socialist approach. State Bank of India had been nationalised in 1955 itself, and the insurance sector in 1956.<\/li>\n<li><strong>Large Number of Private Bank Failures: <\/strong>According to <strong>RBI\u2019s History series-<\/strong>\n<ul>\n<li>The number of commercial banks was <strong>brought down sharply from 566 in 1951 to 91 in 1967<\/strong> in order to consolidate commercial banking, which was very fragile.<\/li>\n<li>\u00a0By the mid-1960s, Indian banking had become far more viable than ever before.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Financial Inclusion: <\/strong>The expansion of branches was mostly in urban areas, and rural and semi-urban areas continued to go unserved. (<strong>RBI History\u2019s Volume 3 notes<\/strong>)<\/li>\n<li><strong>No consensus among the changing regime: <\/strong>Even the changing ruling parties didn\u2019t agree on privatisation.<\/li>\n<li><strong>Disagreements of RBI Governor:<\/strong> former RBI Governor Dr Y V Reddy once said, nationalisation was a political decision, so privatisation too will have to be one.<\/li>\n<\/ul>\n<p><strong>Is this push for Privatisation a Panacea?<\/strong><\/p>\n<ul>\n<li><strong>Concerns regarding Private Bank\u2019s Performance:<\/strong>\n<ul>\n<li><strong>Governance issues: <\/strong>\n<ul>\n<li>ICICI Bank MD and CEO Chanda Kochar was sacked for allegedly extending dubious loans.<\/li>\n<li>Yes Bank CEO Rana Kapoor was not given extension by the RBI and now faces investigations by various agencies.<\/li>\n<li>Lakshmi Vilas Bank faced operational issues and was recently merged with DBS Bank of Singapore.<\/li>\n<\/ul>\n<\/li>\n<li><strong>Under Reporting of NPAs:<\/strong>\n<ul>\n<li>In the 2015 Asset Quality Review by RBI, private sector banks including Yes Bank were found to be under-reporting NPAs.<\/li>\n<li>Former Axis Bank MD Shikha Sharma too was denied an extension.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>Concerns regarding successful disinvestment:<\/strong>\n<ul>\n<li>Initial plan was to <strong>privatise four public sector banks<\/strong>.<\/li>\n<li>The <strong>recent target of privatising two banks this fiscal year will act as a case study for the next two<\/strong>.<\/li>\n<\/ul>\n<\/li>\n<li><strong>May Defeat goal of Financial Inclusion:<\/strong>\n<ul>\n<li><strong>PSBs met their Priority Sector Lending (PSL) targets for agriculture of 18 per cent<\/strong> while <strong>private banks and foreign banks failed to meet the targets at 16.2 percent and 16.7 percent, respectively in 2019<\/strong>. (RBI data)<\/li>\n<\/ul>\n<\/li>\n<li>Distancing from <strong>Socialist Goal mentioned in Preamble<\/strong>\n<ul>\n<li>Violation of <strong>DPSP under Article 38 which mandates the government to work for the welfare of people via socio-economic justice. <\/strong><\/li>\n<li>Private sector banks don\u2019t share the <strong>government\u2019s social responsibilities.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p><strong>Conclusion:<\/strong><\/p>\n<p>Privatisation is likely to succeed in the present changed scenario. Reasons are as follows.<\/p>\n<ul>\n<li>Private banks are now <strong>more responsible towards the fulfilment of social goals<\/strong> rather than narrow profit motives.<\/li>\n<li>Private banks are now <strong>with more diverse loan portfolios<\/strong> and taking the <strong>help of technology<\/strong> to <strong>increase their customer base<\/strong>.<\/li>\n<\/ul>\n<p>But the government should also be <strong>cautious<\/strong> and <strong>ensure enough safeguards<\/strong> to ensure pre 1960s situations of rampant private banks failures do not re-emerge. Few steps which can be taken are as follows:<\/p>\n<ul>\n<li><strong>Strengthen RBI\u2019s regulation over PSBs.<\/strong><\/li>\n<li>Implementation of <strong>Kotak Committee Recommendations<\/strong> on Corporate Governance of Banks.<\/li>\n<\/ul>\n<p>Source: <a href=\"https:\/\/indianexpress.com\/article\/explained\/privatisation-of-public-sector-banks-union-budget-npas-psu-7183446\/\" target=\"_blank\" rel=\"noopener\">IE<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>In News: Union Budget has proposed privatisation of two banks in addition to IDBI Bank and General Insurance company. It may give the private sector a key role in the banking landscape after 51 years of nationalisation in 1969. Currently, there are ten nationalised banks in addition to IDBI Bank and SBI. Reasons behind the [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":13845,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13844","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2023\/07\/2918816current-affairs.jpg","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13844","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=13844"}],"version-history":[{"count":0,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/13844\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media\/13845"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=13844"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=13844"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=13844"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}