Experts caution against any move to privatise Public Sector Banks

Today, July 19, marks 53 years since the Congress government led by the then prime minister Indira Gandhi nationalised over a dozen private banks as part of a successful strategy which contributed immensely to the economy and raised financial inclusion. The move led to India emerging as a strong economy.

In the past few years, however, attempts are being made to discredit public sector banks and attribute all their problems to government ownership, making a case for their eventual privatisation.

On Tuesday, on the anniversary of the nationalisation of banks, Congress MP and AICC general secretary in charge of communication Jairam Ramesh flagged this issue. “Today, 53 years ago, banks were nationalised. It was a transformational change. Now, Modi Sarkar is on a privatisation spree. Public sector banks must be equipped to face competition, but selling them off to a chosen few will be disastrous! Congress will oppose the Bank Sale Bill,” he tweeted.

Susheel Ragade, a former RBI official explained that while the Union government is facing difficulties in providing additional capital to the government banks on account of fiscal constraints, the banks need this money to be able to maintain Capital Adequacy Ratio for continuing their lending operations.

“But using these problems as a reason for privatisation of public sector banks is akin to throwing the baby out with the bathwater,” he said.

According to experts, the government can exit from these banks only after a valuation exercise is carried out. “One way to ascertain the valuation is based on its present market capitalisation. To find the right buyer, we will have to look for someone with financial powers that will match this present market capitalisation. If sold, this might go up depending on investor perception,” a senior banker said.

National Stock Exchange data published in the media shows the public sector banks’ market capitalisation value comes to Rs 7,24,436.21 crore (March 31, 2022). As per a report in The Hindu, these banks are not fully owned by the government and hence the value of government holding in these banks (based on market cap) comes to Rs 4,80,207.35 crore.

As per recommendations of the National Council of Applied Economic Research (NCAER), the first two banks to be privatised should be the ones with better asset quality and the lowest NPAs. “This means, take the best ones away,'' said Dr. Santosh Khalate, an assistant professor at the Pune District Education Association's Mahatma Phule Institute of Management and Computer Studies.

Khalate, who has written a research paper on NPAs of public sector banks, points out that even as privatisation is being considered, the NPAs in the banking sector are increasing year by year, particularly in nationalised banks, an issue that needed to be resolved.

A report recommending the privatization released by NCAER suggests that barring the State Bank of India (SBI), all public sector banks should be privatised because private sector banks have emerged as alternatives to the PSBs with substantial market share. The report said that the Reserve Bank of India was not able to regulate the sector as government ownership was a hindrance.

The All-India Bank Officers’ Confederation (AIBOC) termed any move to privatise PSBs as dangerous and one that would result in job losses, branch closures, and financial exclusion.

Data compiled by the confederation showed that PSB mergers had brought down the number of public sector banks from 27 to 12. The number of PSB branches declined by 3,321 between March 2017 and September 2021. “This has resulted in employees being retrenched and bank branch closures. The total employee strength of PSBs dropped from 8.57 lakh in March 2017 to around 7.7 lakh in March 2021,” its general secretary Soumya Datta explained.

The AIBOC is also worried that besides shrinking employment opportunities for the youth, the government’s move to sell banks would deprive the SC/ST/OBC sections among bank employees of reservations. “The private sector does not follow reservation policies for the weaker sections,” the confederation pointed out.

Experts in the banking sector said the government’s unwillingness to make its plans public hinted at its ulterior motive to hand over prime institutions to rich friends. “This manner of privatisation should not be accepted. Institutions that are over a 100-year-old with branches across the country, cannot just be given on a platter to a select few. Begin with other urgent reforms. Target NPAs and strengthen the banking system,” a retired banker said.