Privatisation of Banks: 'Gradual approach needed for better result'

Mumbai: Reserve Bank of India (RBI) in a resesrch paper on Friday favoured a gradual rather than big bang approach for privatisation of Public Sector Banks (PSBs) for better outcome.

The research paper published in the August 2022 issue of RBI Bulletin said "the gradual approach to privatisation adopted by the government can ensure that a void is not created in fulfilling the social objective of financial

inclusion".

The article also highlighted that recent mega merger of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks.

In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12.

United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank; Syndicate Bank was amalgamated with Canara Bank; Allahabad Bank was amalgamated with Indian Bank; and Andhra Bank and Corporation Bank were consolidated with Union Bank of India.

In a first three-way merger, Dena Bank and Vijaya Bank were merged with Bank of Baroda in 2019.

Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India.

Evidence suggests that public sector banks are not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks, the article titled 'Privatisation of Public Sector Banks: An Alternate Perspective' said.

"A big bang approach of privatisation of these banks may do more harm than good. The government has already announced its intention to privatise two banks. Such a gradual approach would ensure that large scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission," it said.

Thus, the researchers are of the view that instead of a big bang approach, a gradual approach as announced by the government would result in better outcomes, it said.

The central bank said the views expressed in the article are of the authors and do not represent that of the Reserve Bank of India (RBI).

While private sector banks are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion, the article in the latest RBI Bulletin said.

"Privatisation is not a new concept, and its pros and cons are well known. From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it," it said.

Meanwhile, Rajasthan accounted for the highest share in the total cost of projects sanctioned by banks and financial institutions in 2021-22, retaining the top place for two consecutive years, as per an article published in RBI bulletin.

Rajasthan was followed by Uttar Pradesh and Gujarat.

"State-wise data reveals that during 2021-22, more than half (56.4 per cent) of the projects were taken up in five states, viz., Rajasthan, Uttar Pradesh, Gujarat, Maharashtra and Tamil Nadu," said the article titled 'Private Corporate Investment: Growth in 2021-22 and Outlook for 2022-23'.

The share of these five states increased significantly from an average share of 40.7 per cent during the period between 2012-13 and 2019-20 to more than 50 per cent during the last two years.

The article uses data on investment intentions by the private corporate sector based on the phasing plans (ex-ante) of their project proposals to arrive at the aggregate investment intentions and assess the outlook for investment activity in the near term.

"After set back in pandemic period, announcements of new investment projects increased significantly during 2021-22, with total cost of project recording an increase of about 90 per cent over 2020-21, but still remaining below the pre-pandemic level," it said.

Infrastructure sector continued to attract maximum capex projects, led by 'power' and 'road and bridges' sectors.

Reflecting various policy initiatives undertaken by the government, investment in renewable energy is gaining traction over the years. "Going forward, improved private corporate balance sheet, rising capacity utilisation level, robust demand sentiments, higher capital spending and various policy initiatives by the government are expected to revive the capex cycle," it said.