Privatisation of India’s public sector banks is like Waiting for Godot

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The Reserve Bank of India (RBI) released its customary monthly bulletin for the month of august. One of the research articles in the bulletin on privatisation of public sector banks (PSBs) created a storm in the financial markets, and media. So much so, the central bank had to issue an unprecedented clarification on the purpose of the article.

What did the research article/paper say that it led to so much controversy? The privatisation of PSBs has been a controversial issue for a long time, and anything from the government or the RBI usually is discussed widely. This time is no different.

The research article analysed the performance of the PSBs with that of the private banks (PVBs) across both profitability and financial inclusion metrics. The research found that while the PVBs were more efficient in terms of profit maximisation, the PSBs have done better in promoting financial inclusion.

They also found that lending by the PSBs is less procyclical than the PVBs. This means that the PSBs don’t increase (or decrease) credit with the business cycle as much as the PVBs. This implies that in case of a slowdown, the PSBs are less impacted than the PVBs. As the PSBs are healthier during an economic slowdown, they respond better to the countercyclical monetary policy followed by the central bank. The PSBs have also weathered the COVID-19 storm despite weaker balance sheets.

There is a general view that privatisation is a panacea for all economic ills. The bulletin article argues that there is a need for a more nuanced approach while pursuing privatisation. In the case of the Indian banking sector, the analysis suggests that the PSBs still have a role to play in terms of financial inclusion, and monetary transmission. The authors also list some recent reforms by the government of merging the PSBs, and the creation of the National Asset Reconstruction Company Limited (NARCL) to clean bad loans from their balance sheets. The government has already announced its intention to privatise two banks.

Based on its analysis, the authors suggest that ‘a big bang approach of privatisation of these banks may do more harm than good’. The paper advocates a more gradual approach compared to a large-scale big-bang privatisation.

A few media reports said that the RBI has cautioned the government against a big bang approach to bank privatisation. Some others reported opposition parties saying that the government is ignoring the RBI’s advice on privatisation. On reading the RBI paper, it is clear that the authors have not said anything that is not in sync with the government’s view. In fact they have agreed to the government’s gradual approach towards bank privatisation. The RBI was caught in a crossfire prompting it to issue a quick clarification saying the views are of the researchers, and not that of the RBI.

One reason for this controversy is because of the expectations raised by the government. The current Union government has projected itself as one committed to big bang privatisation. The government has styled itself on the Thatcher-Reagan model of governance, which believed in getting government out of business by selling public assets in a big bang manner. However, the track record of the government on disinvestments has been more gradual than big-bang. The government announced selling two public sector banks in the 2021-22 Union Budget — which has not been achieved to date. Hence, it is not clear why this image of the government as a big bang reformer and privatiser remains.

Another research paper, this one written by Poonam Gupta (Director General, National Council of Applied Economic Research, and member of the Economic Advisory Council to the Prime Minister) and Arvind Panagariya (former Vice-Chairman, Niti Aayog), warrants discussion. In this July 2022 paper, the authors compare the PSBs with the PVBs, and find the latter to be superior to the former across most indicators (the RBI paper does not agree). Their analysis leads to the proposal that all the PSBs barring the State Bank of India, be privatised. This paper suggests a more big bang approach than the RBI paper, but it did not create a controversy.

To sum up, the government needs to decide and act on PSB privatisation, which has been pending for a while now. The government should release a white paper on bank privatisation, as suggested by the Opposition. If the government does not want to privatise, then also it should say so.

If it wants to privatise the PSBs, it should stick to the timelines. So far, the events around PSB privatisation reminds one of the Samuel Beckett play ‘Waiting for Godot’. The two main characters in the play keep waiting for Godot, who does not come till the play ends. Replace the two characters in the play with the markets and economists, and something similar is happening with PSB privatisation as well.