The latest Reserve Bank of India (RBI) bulletin published on August 18 suggests that a big bang approach to privatisation of government-owned banks may do more harm than good.
A paper published in the bulletin analyses various pros and cons of privatisation and identifies how an emerging economy like India may face more challenges due to the privatisation of banks.
Some of the major reasons as identified by the RBI paper that show PSBs can serve the country better than private banks include better financial inclusion, better credit system, and better efficiency of the PSBs.
The paper highlighted that the private banks have failed to cater to the customers of the rural and semi-urban areas to date and customers from such locations are relying heavily on PSBs for banking.
Moreover, due to countercyclical monetary policy actions to gain traction, PSBs are able to do policy transmission faster and better, suggests the study. “During the last easing cycle, for example, their reduction in lending rates was substantially higher than that of private banks,” added the study.
As pointed out in the RBI Bulletin, PSBs help the countercyclical monetary policy to gain traction, private ownership alone does not automatically generate economic gains in developing economies, rather a more cautious and nuanced evaluation of privatisation is required.
The paper also suggests that market confidence tends to be in favour of PSBs in terms of crisis. At the onset of the global financial crisis, deposits flew out of private banks to PSBs. The outflows happened despite these banks offering relatively higher interest rates than others.