Home Business Bank Privatisation Should Be Gradual As Big Bang Approach May Do More Harm Than Good: RBI Paper

Bank Privatisation Should Be Gradual As Big Bang Approach May Do More Harm Than Good: RBI Paper

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Bank Privatisation Should Be Gradual As Big Bang Approach May Do More Harm Than Good: RBI Paper

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The Reserve Bank of India (RBI) has said that bank privatisation should be a gradual process as a big bang approach of public sector banks (PSBs) may do more harm than good. It added that the gradual approach would ensure that large-scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission.

In the Union Budget 2021-22, the government announced its intent to take up the privatisation of two PSBs. “A big bang approach of privatization of these banks may do more harm than good. The government has already announced its intention to privatize two banks. Such a gradual approach would ensure that large-scale privatization does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission,” according to an RBI paper.

It said PSBs account for the highest share of bank branches in rural areas, followed by semi-urban areas, in adherence to their commitment to the financial inclusion objective. The PSBs dominate in meeting the credit demand of rural areas. Although PVBs (private banks) have been making some inroads in the rural areas, their progress remains slow.

“It is often argued that PVBs meet their priority sector lending (PSL) target of 40 per cent fully and thus contribute towards financial inclusion. Granular data however show that the PVBs have met their priority sector targets not through organic lending but through investment in priority sector lending certificates (PSLCs), especially in agriculture and small and marginal farmers categories. These categories of priority sector lending are especially challenging and attract higher premium. The PVBs have shown willingness to pay higher premiums to meet their PSL targets rather than develop skills and expertise in such lending,” the RBI paper said.

It also 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.

“This article provides an alternative view with evidence that public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike PVBs. Our results also point out the countercyclical role of PSB lending. In the recent years, these banks have also gained greater market confidence. Despite the criticism of weak balance sheets, data suggests that they weathered the COVID-19 pandemic shock remarkably well,” the RBI paper added.

It also said recent mega-merger of PSBs has resulted in the consolidation of the sector, creating stronger and more robust and competitive banks. The establishment of National Asset Reconstruction Company Limited (NARCL) will help in cleaning up the legacy burden of bad loans from their balance sheets. The recently constituted National Bank for financing infrastructure and development (NABFiD) will provide an alternate channel of infrastructure funding, thus reducing the asset-liability mismatch concerns of PSBs. Overall, these reforms are likely to help strengthen the PSBs further.

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