Debate over bank privatisation rages on, but experts say it is inevitable

The 2021 Budget outlined the intent to privatise two public sector banks

The proposal to privatise two public sector banks, announced in 2021 by Finance Minister, Nirmala Sitharaman, is yet to take off, according to experts this decision is irreversible. Despite objections and arguments in favour of preserving state-owned banks to strengthen welfarism by stakeholders and trade unions, it will happen, they say.

The finance minister had announced the government’s intent to privatise two public-sector banks in the 2021 Union Budget as part of the new public sector enterprise (PSE) policy that restricted the number of players in the public sector to a maximum of four in strategic areas.
The banking, Insurance and Financial Services, a strategic sector currently has 12 public lenders and about five insurers.

“I think the big step was the new PSU policy. That policy is now approved and it is in place and I don’t think anyone is going to change it. My experience with policy reform is you take the big decision. It does not matter if implementation is delayed because there is no point in announcing a policy and being forced to reverse it. In that sense, I think privatisation of public sector banks will happen but I cannot judge at this point of time when it will happen. I would say the probability of it happening will go up after elections,” NITI Aayog member Arvind Virmani told Moneycontrol.

Rajnish Kumar, Chairman, of Mastercard and former State Bank of India Chairman agrees.

“Bank privatisation continues to be on the agenda. Many private institutions are very active in financial inclusion. I don’t think that it will be impacted if we have more private banks,” Kumar told Moneycontrol.

The first step for bank privatisation is an amendment to the Banking Acts which is yet to get a go-ahead from the Prime Minister’s Office. The change is required in the Banking Companies Acquisition Act, 1970/1980 which prescribes a minimum 51 percent share of the government.

“Unfortunately, sometimes, politics and ideology trump. But even in this case, eventually, it will happen because that is the reality. Some past experiences or templates can be used to see through the privatisation of PSBs. Air India is a good template,” he said.

Drivers of social schemes
Supporters of the welfare argument feel social schemes may be impacted because public sector banks play a big role to facilitate such measures. The government has been asking these banks to increase their share in these schemes. Some examples are, Pradhan Mantri Jan Dhan Yojana (PMJDY), Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Atal Pension Yojana (APY), Pradhan Mantri Mudra Yojana, Stand Up India Scheme, Sukanya Samridhhi Scheme, Senior Citizen Saving Scheme and the Kisan Vikas Patra.

Most of these schemes are targeted at rural areas and the fear is that these might be affected. The number of public sector banks (PSBs) has already come down from 27 to 12 due to mergers over the years.

“When it comes to the social responsibility of banks, PSBS are better placed than private sector banks. Large parts of the banking business in rural areas are done by public sector banks. There are many indicators supporting that kind of argument, one would be the Jan Dhan accounts itself, the number of branches of PSBs are more in rural areas. The reach and cost matter a lot. Strong and efficient banks are important, be it public or private, but when it comes to rural areas, PSBs are better placed to do business,” economist N R Bhanumurthy told Moneycontrol.

Another rationale behind the government’s intent to privatise PSBs is to bring in competition in the overall banking sector while ensuring the growth of the sector. But the number of times the central bank has fined private sector banks of late suggests that private sector banks are not necessarily more efficient compared to state-owned banks, Bhanumurthy adds.

Opposition of Bank Unions
The bank unions see PSBs as nation-building institutions that utilise public savings for priority sectors like agriculture and have been going on strike from time to time to oppose it. In 2021, eight lakh bank employees went on strike against privatisation.

“Banks have huge resources in the form of deposits of the people. PSBs are able to deploy these resources on a priority basis in agriculture, employment generation, poverty reduction, infrastructure, rural development and education. If banks are privatised, everything will become commercial. Public sector banks are the golden goose. It is unwise to kill them. People’s money should be utilised for welfare and not for private profiteering. Public Sector Banks are nation-building institutions. The privatisation of banks is unwise in India. YES Bank is private, but it collapsed,” All India Bank Employees Association (AIBEA) General Secretary C H Venkatachalam told Moneycontrol.

“The government is aware of our stiff opposition and hence they are going slow or maybe they have other priorities now. Anyway, they have not moved further in the matter so far. But I don’t believe that they have abandoned the decision. The agenda is still alive,” he added.

The bank unions are determined to continue the stiff resistance against privatisation, which may have been a factor behind the government's reluctance to move ahead with this Budget announcement.

“Privatisation of public sector banks is certainly not in the right direction. Our nation has got more than six lakh villages and every village having a population of 2,500 should have one brick and mortar model of a public sector bank branch. Any attempt to privatise the existing public sector banks would be resisted by the bank unions,” All India Bank Officers' Association (AIBOA) General Secretary Nagarajan S told Moneycontrol.

Given the heated debate over privatising PSBs, Bhanumurthy says there is a need to take the middle path.

“We have vast experience of merger and acquisitions between public and private banks. I don’t think there is a singular conclusion on the question of whether public banks should be privatised,” he said.