A policy paper by Poonam Gupta, NCAER Director-General and member of the Economic Advisory Council to the Prime Minister (PMEAC), and Arvind Panagariya, former NITI Aayog Vice-Chairman and Columbia University professor, has recommended privatisation of all public sector banks except State Bank of India.

The influential economists have recommended that all public sector banks should be privatised and only the State Bank of India, due to its better performance, may remain under government ownership.

They have opined as follows: “In principle, the case for privatisation we have made applies to all PSBs including SBI. But we recognise that within the Indian economic framework and political ethos, no government will want to be without a single PSB in its portfolio. Keeping this in view, the goal, whether stated explicitly or left implicit, should be to privatise all PSBs other than SBI…”

“Of course, if some years later, the circumstances turn yet more favourable to privatisation, the goalpost may be moved to include SBI in the privatisation list,” the authors argued.

They said that with the bulk of banking moving into the private sector, the RBI will also feel the pressure to streamline its processes, rules, and regulations to deliver superior outcomes since the fact of three-fifths of the banking sector being outside its regulatory reach would no longer serve as an explanation for its lapses.

In another development, it is also reported that the government plans to initiate the next round of public sector bank mergers after analysing a detailed study that has been commissioned on the outcome of amalgamation in public sector banks.

Back in time

Persons who are recommending total privatisation of all banks fail to see the banking history in this country. There was a sea change in the penetration of banks after the government took over 14 banks in 1969. Inclusive banking and mass banking were possible only through government banks. Only government banks were in the forefront to execute government schemes to help agriculture and small scale industries. Forty-two crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening the Prime Minister Jan Dhan Yojana account, a recent government initiative.

The switch from class banking to mass banking was possible only due to government banks and any attempt to privatise all banks will be disastrous, as the common man will be driven out from the banking scene by private entities whose aim will only be to make profits for their shareholders at the cost of other stakeholders.

After the formation of Reserve Bank of India in 1935 and up to the period of our getting Independence (1947), there were 900 bank failures in our country. From 1947 to 1969, 665 banks failed. The depositors of all these banks have lost their deposited money.

Since the nationalisation of banks in 1969, 36 banks failed but these were rescued by merging them with other government banks. This included even a big bank like Global Trust Bank Ltd. Recently, the RBI had to come to the rescue of Lakshmi Vilas Bank Ltd and YES Bank Ltd, through the pumping in of capital by other entities. There were also many cooperative banks closure and the strength of 1,926 town cooperative banks which were in 2004 have shrunk to 1,551 in 2018.

Bank failures

How are the advocates of privatisation of banks going to explain the failure of private banks for the past 90 years in the country? Do they want a repeat of such bank failures?

The banking industry is different in the sense that banks are run with huge public deposits with miniscule shareholders’ funds, and failure of any bank will have a disproportionate contagion effect.

Government ownership gives tremendous faith to depositors who opt for bank deposits even though the rate of interest is often below the inflation rate. Disturbing this structure will make the banking structure collapse.

The market value of government holding in banks is around ₹4,80,207 crore. To privatise these banks there should be buyers who can pump in this much of money. As industrial houses cannot have controlling interest in banks as per RBI licensing norms and as the present banks and NBFCs do not have adequate financial surplus, there are no eligible buyers for these banks. Hence recommending privatisation of all banks is utopian.

The writer is a retired banker