- The Modi government has planned to introduce Banking Laws (Amendment) Bill, 2021 during the ongoing Parliament session.
- The Indian banking sector is in a deep mess, thanks to typical public sector inefficiency. Despite the best efforts of the government, the banking in the country, dominated by the public sector, improved only a little.
- The Banking Laws (Amendment) Bill, 2021, which will enable the government to privatize a few public sector banks and reduce the share in others, is set to get Union cabinet approval very soon.
- The banking sector at the moment is playing the role of a decelerator in the economic growth of the country given the fact that credit penetration in India is one of the lowest in the world.
The employees of public sector banks, are on a two-day strike against the Modi government’s attempt to privatize smaller banks. The Modi government has planned to introduce Banking Laws (Amendment) Bill, 2021 during the ongoing Parliament session. However, the bank employees, who are feeding on taxpayers’ money and the second biggest burden to the treasury after the government schoolteachers, are opposing the move that would save billions of dollars every year from the government coffers.
AIBEA General Secretary CH Venkatachalam said, “We reiterated our stand that if the government would assure that the Bank Privatisation Bill (Banking Laws Amendment Bill, 2021) would not be tabled during this session of the Parliament, we would be inclined to reconsider the strike but the government could not give any such assurance to us.”
The Indian banking sector is in a deep mess, thanks to typical public sector inefficiency. Despite the best efforts of the government, the banking in the country, dominated by the public sector, improved only a little. Insolvency and Bankruptcy Code (IBC), one of the best resolution and liquidation mechanisms set up by any country, has improved the PSBs on the Non-performing assets front, but the other metrics of the majority of the public sector banks remain poor.
The Banking Laws (Amendment) Bill, 2021, which will enable the government to privatize a few public sector banks and reduce the share in others, is set to get Union cabinet approval very soon. During the AtmaNirbhar Bharat proposals, the Modi government has made it very clear that only 4 large Public Sector Banks will be maintained, and the rest will be privatized.
In the Union Budget in February this year, Finance minister Nirmala Sitharaman repeated the proposal and set a target of disinvestment worth 1.75 lakh crore rupees by privatizing and selling stakes in public sector banks.
With the approval of the Union cabinet, the process will start very soon. The list business for the winter session reads, “To effect amendments in Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980 and incidental amendments to Banking Regulation Act, 1949 in the context of Union Budget announcement 2021 regarding privatization of two Public Sector Banks,”.
Consolidation and privatization of the banking sector are necessary for the expansion and growth of the financial sector of the country. The banking sector is playing the role of a decelerator in the economic growth of the country given the fact that credit penetration in India is one of the lowest in the world. The reason behind this lacklustre performance of the Indian banking sector is the domination of the public sector banks which account for around 70 percent of the country’s banking industry. It has been almost five decades since Indira Gandhi nationalized banking in 1969, with the intention to improve lending in ‘strategic areas’, but since then the banking story of the country has only gotten worse.
The nationalization of banks made them a highly political entity. The loans to corporates were being decided on their coziness with the political establishment. In fact, one can argue that the high time of ‘crony capitalism’ started with the nationalization of banks. The accumulation of bad loans in Public Sector Banks is proof that they are more prone to bad decisions.
The investor confidence in PSBs is so low that the market capitalization of all PSBs is lower than that of HDFC. A single private sector bank is valued more than all public sector banks of the country. In fact, a small unknown private bank named AU Small Finance Bank, which operates more like a non-banking financial company, has a market capitalization of 35,083 crore rupees, more than Punjab National Bank (PNB)- the second largest public sector bank- which is valued 29,948 crore rupees. Bandhan Bank, another small private sector bank founded in 2015, is valued at 64,473 crore rupees, more than double of Punjab National Bank.
This is because the investors have no confidence in public sector banks, which always perform poorly; no matter how much time and money the government puts into these entities.
In the last Economic Survey, policymakers argued that India should have at least 6 banks at the top, while it currently has only one- SBI. Even countries like Finland, Austria, and Denmark perform better than India. The Survey observed, “India’s banks are disproportionately small, compared to the size of its economy. In 2019, when the Indian economy is the fifth-largest in the world, our highest ranked bank—State Bank of India— is a lowly 55th in the world and is the only bank to be ranked in the Global Top 100,”.
The primary reason behind the poor performance of Indian banks is the domination of the public sector in the banking and financial services industry. The PSBs are well known for their inefficiencies and lethargic operations. Most of them operate under public pressure and have been infamous for giving loans on phone calls. The investor confidence in PSBs is so low that the market capitalization of all PSBs is lower than that of HDFC. A single private sector bank is valued more than all the public sector banks of the country.
The only solution to improve the banking in the country is to privatize all PSBs except a few big ones like the State Bank of India and Bank of Baroda and better manage them. These PSBs could act as a hedge in times of financial crisis, as PSBs make management of financial crisis- regular occurring in any capitalist economy- management easier.
By doubling down on efforts to privatize the inefficient banks (privatization of two PSBs was announced in the last budget) and expanding the scope of business for private sector banks, the Modi government wants to ensure that the sector plays the role of catalyst to India’s growth story, not of obstructionist (which it has played so far). Moreover, given the inefficiency of PSBs, they will not survive in the era of exponential fintech expansion unless driven by a private-sector zeal. The government should sell these entities as soon as possible to ensure that it gets a good value for these entities.