13th June – Privatisation of PSBs

Privatisation is not a panacea for PSBs

If news reports are to be believed, the government is likely to designate banking as a strategic sector under the new privatisation policy. This will allow the government to own a maximum of four public sector banks (PSBs), and thus, some PSBs which have not been included in the already completed consolidation process will be privatised.

Government opinion –

The government’s policy on this score has been outlined with great clarity by the principal economic adviser who has said the government is “clear and unapologetic” about privatisation of public sector enterprises as a part of reforms. Given current market conditions, this can take time, but any delay will not be on account of “lack of intent”.

Is privatisation the correct way forward?

  • The best proof that the problems of Indian banking transcend issues of ownership lies in the plight of YES Bank. The cardinal malaise of Indian banking is a lack of adequate governance, stretching across public and private ownership, and it stems from the nature of Indian politics and entrepreneurial culture.
  • Politicians will not allow PSBs to be run professionally, and promoters of private banks, too, often try to run too fast and cut corners in the process. Plus, there are issues of personal probity, which have come to light over the actions of former leaders of some of the largest private sector banks like ICICI Bank and Axis Bank.

Specific reforms –

Underneath this overarching reality, Raghuram Rajan, with his clear-sightedness and academic rigour, has outlined a range of actions that need to be taken to address issues bedevilling PSBs.

  • First, The Company Law Tribunal needs to keep evolving, so that it acts as an apex body to which only defaulting companies that cannot be restructured through negotiation can be brought for bankruptcy proceedings. For the negotiation process to work, bankers need to be confident that their commercial decisions will not come under subsequent scrutiny. Plus, the Bankruptcy Code has to be made effective and transparent so that it cannot be gamed by unscrupulous promoters.
  • Second, the hardy old point is that the governance and management of PSBs has to improve. The way to do this was outlined by the PJ Nayak committee, which recommended distancing between the government and top public sector appointments (everything the Banks Board Bureau was supposed to do but could not).
  • Third, instead of getting involved in a sterile debate over privatisation, why not follow an evidence-based approach? Why not privatise a couple of mid-sized banks and take government ownership to below 50 per cent in a couple of other banks. This will give us three types of ownership: wholly government-owned, majority government-owned and large minority stake held by the government. Attempts at better governance across these can yield valuable lessons on what works and what does not, irrespective of theory and ideology.
  • Fourth, overall, de-risk banks which handle too many risks, by letting them handle what they can and transferring the rest to non-banks and the market. To de-risk banks, develop a wide and deep financial market which can absorb non-bank equity and have a range of instruments to capture different kinds of risk.
  • Finally, reduce the number and weight of mandates for PSBs. By now, the well-established one is debt waiver for farmers. They need a lot of help from the government but debt waiver, which eats away at repayment culture, is not one of them. It is equally pernicious to subject banks to mandated lending.

Conclusion –

So merely privatising PSBs will get you nowhere. A whole lot of intricate sector-specific reforms must also be carried through to get useful results.

SourceThe Hindu Business Line

QUESTION – The Government plans to privatise the public sector banks to make them more efficient in handling the financial sector of India. Comment.

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