Privatisation is not the answer
There has been debate and suggestions that the government of India should privatise public sector banks (PSBs), which have played a pivotal role in the country’s economic development since their nationalisation in the late 1960s. As of 23 September 2012, public sector banks have total assets of Rs149.02 lakh crore ($1.79 trillion) and deposits of Rs122.13 lakh crore ($1.47 trillion). In comparison, private banks have total assets of Rs97.69 lakh crore ($1.17 trillion) and deposits of Rs68.63 lakh crore ($824 billion). And, despite facing challenges such as NPAs, work culture constraints on terminating non-performing employees, political policy changes and the changing landscape of banking, the PSBs have adapted and managed to stay competitive in many parameters.
Industry snapshot: As of April-September 2023, PSBs in India reported a net interest income of Rs1.99 lakh crore ($240 billion) -- slightly higher than the Rs1.77 lakh crore ($214 billion) recorded by private sector banks. PSBs also maintained a dominant position in deposits and assets, with Rs122.13 lakh crore ($1.48 trillion) and R87.63 lakh crore ($1.06 trillion), as against R68.63 lakh crore ($831 billion) and R63.76 lakh crore ($772 billion) in the private sector.
In India, where there are wide disparities in income, banking cannot be solely profit-driven but must also focus on social and economic development. Despite facing several challenges over the years, these banks have demonstrated their critical importance in various economic and social development dimensions.
Advances to infrastructure: PSBs have been leading in advances, with net advances totalling Rs87.63 lakh crore ($1.05 trillion) as of 30 September 2023, compared to Rs63.76 lakh crore ($768 billion) by private sector banks. More notably, PSBs contributed 75 per cent of infrastructure loans, amounting to Rs9.76 lakh crore ($117 billion) and had Rs1.80 lakh crore ($22 billion) spread across 400 million accounts. In contrast, private sector banks had Rs6,560 crore ($0.8 billion) spread across 15.9 million accounts.
Financial inclusion: PSBs have been crucial in advancing financial inclusion in India, primarily due to their extensive branch network. The 12 PSBs have about 87,526 branches – 28,884 in rural areas, compared to the private sector’s 38,000 + branches in total. This network enables PSBs to reach unbanked and under-banked populations. As of March 2023, PSBs had outstanding agriculture loans totalling Rs12.77 lakh crore ($154 billion), as against Rs7.53 lakh crore ($90 billion) by 21 private sector banks. PSBs allocated about 58 per cent of these loans to small and marginal farmers, compared to 47 per cent by private banks, highlighting their significant role in agriculture lending.
For the fiscal year ended March 2023, PSBs disbursed Rs1.71 lakh crore ($21 billion) in MUDRA loans, while private sector banks disbursed Rs1.41 lakh crore ($17 billion), with 12 PSBs accounting for 55 per cent of the total loans.
Reorienting PSBs: Appoint professionals to the board. The top management should report to the board in theory and practise than to the ministry.
Remove non-core activities, like rashtra bhasha, attending regional district level committees, etc.
Create specialist for functions like risk, treasury, etc, and insulate them from transfers.
Provide a five-year vision and top management continuity for minimum of five years – enhanced access and service excellence (EASE) reforms are supposed to address this.
The advantages of PSBs in India are multifaceted, extending beyond mere financial transactions, to encompass social and economic development. While there are arguments for improving the efficiency and profitability of PSBs, privatisation is not the panacea. The government’s role in directing these banks towards national priorities is crucial. Rather than privatising, efforts should be made to reform and strengthen PSBs, ensuring they continue to serve the broader interests of the economy and society. This approach will help maintain the delicate balance between profitability and social responsibility, ensuring sustainable and inclusive growth for the nation.
The author is BFSI Advisor, Practus