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Explained: Privatisation of Public Sector Banks in India

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Generally speaking, it is an assumption in the minds of people that private banks are better than public sector banks for various reasons. For example, it has been believed that private banks have better accountability and scrutiny in the management than public sector banks. It is also assumed the problem with public sector banks is that they have poor governance, and they are a burden on the government’s capital. It has been noticed that private sector banks perform better than public sector banks for a very long time now. The biggest reason why this topic becomes important and being discussed for more than a decade now is that the government thinks that the only solution to fight the rising bank crisis is privatisation. But nothing can be without faults.

Background: How it Started?

The Indian Government recently stated that it has considered the banking sector under the strategic sector of the new privatising policy as a part of the ‘Atmanirbhar Bharat’ package. In the Union budget 2020 – 2021, the Union Government has provided the roadmap to the new policy of strategic disinvestment in various sectors, which includes the banking sector as well. The government wants to keep a bare minimum investment in this sector. According to this new policy, it has been said that only four state-own companies should be in these sectors at maximum. Currently, 12 Public Sector Banks operating are operating.

Why is there a Need for Privatisation?

The Union government of India as well as various experts of this field provided various reasons for why there is a need for privatisation of public sector banks at this moment. One of the major reasons for the banking sector crisis and the problem which all these banks are facing in the recent time is the increasing NPA (Non-Performing Assets) by the public sector bank. In the current fiscal year, the non-performing assets have been increased by one lakh crore which has increased the total NPA of the banking sector to 6.8 trillion Indian rupees.

In the last few years, the Indian banks have also witnessed various bank loan scams, which have come as another nail in the coffin for government-run banks, and most of the scams happened in public sector banks. Moreover, it is hard to find a number on the magnitude of these bank scams. Also, these public sector banks are misused by various governments from time to time. Another problem which the public sector banks are facing is the dual control because the public sector bank is been controlled by both the RBI and the Finance Ministry, and both have different powers which restrict them in terms to take actions that restrict them to have overall investigation about any issue which makes the process lengthy as well as clashes begins to happen. 

Interference has also become a problem in public sector banks in recent years, as the sector is being run by government funds today. These board appointments are made by the government ministers, and their decision creates a lot of pressure on the management. Public sector banks and private sector banks also have a difference in incentives which puts it on the private sector banks side, private banks have the motive to earn a profit, but the public sector banks do not have a motive of profit. Rather, they focus on various government schemes such as farmer’s loan waivers, etc.

Implications of Privatisation

Even though the Private sector banks have a better record than the Public sector bank, the private sector still cannot be assumed without faults, and it is being said by various experts as well. One of them being RBI’s former Governor Raghuram Rajan. The problem with private banks is that they do not focus on the betterment of people, and their motive is to earn a profit. As a result, they indulge in various malpractices, and the interest tends to remain very high when compared to PSBs. 

The Government cannot take part in the management of the private sector bank as they can in public sector banks. RBI policies, and all the structural problems which the PSBs have, is going to be in private sector bank. They are governed by the same laws in the country. But the government does not have a say in the internal management of private sector banks. It becomes difficult for them to make these banks accountable as well as these banks do not care about any of government policies which are an integral part of the public sector banking management.

Conclusion and Suggestions

There are two committees in the banking sector of India for the proper functioning of Public Sector Banks, the first being the PJ Nayak Committee. It recommended that the government should provide enough support to the bank board bureau for the proper functioning of the bank sector. Secondly, it said that Chairman and Managing Director roles should be different. Further, it should have a fixed tenure of either three years or five years. The second committee was the Narashimham committee, which also provided recommendations to the banking sector of India. Both the committees said that the government should privatise banks and make their stakes in PSBs less than 51%. Furthermore, the government should also make laws to take on the defaulters. is now on Telegram. Follow us for regular legal updates and judgments from the court. Follow us on Google News, InstagramLinkedInFacebook & Twitter. You can also subscribe to our Weekly Email Updates. You can also contribute stories like this and help us spread awareness for a better society. Submit Your Post Now.

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