The Indian banking sector is in a deep mess. Despite the best efforts of the government, the banking sector in the country, dominated by the public sector banks (PSBs), improved only a little. The reason behind this lackluster performance of the Indian banking sector is the domination of public sector banks (PSBs) which account for around 70 percent of the country’s banking industry. Thus, the time has come to privatise every single bank except SBI.
Privatise all PSBs except SBI: NCAER
A report by National Council of Applied Economic Research (NCAER) Director General Poonam Gupta, a member of the Economic Advisory Council to the Prime Minister — and Arvind Panagariya — professor, Columbia University and former vice chairman of NITI Aayog on the privatisation of PSBs informed that the centre needs to privatise all public sector banks (PSBs) but State Bank of India (SBI).
The report titled ‘Privatization of Public Sector Banks in India Why, How and How Far?’ read, “We propose that the case for privatization applies to all PSBs, including SBI. But we recognize that within the Indian economic framework and political ethos, the government would want to retain at least one PSB in its portfolio. Thus, keeping in view its size and relatively better performance, we propose that the goal should be to privatise all PSBs except SBI for now.”
It further read, “In our view, in the pathway toward privatization of all of the 11 PSBs, it is important that the first two banks chosen for privatization set an example for the success of future privatizations. The banks chosen may be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years.”
Why PSBs need to be privatised?
In the 2019-20 economic survey, the policymakers argued that India should have at least six banks at the top, while we have 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 industry. The PSBs are well known for their inefficiency and lethargy. Most of them operate under public pressure and give loans on phone calls.
The investor confidence in PSBs is so low that the market capitalisation of all PSBs is lower than that of HDFC. HDFC is a single private sector bank that is valued more than all public sector banks of the country.
Modi Government’s efforts to improve the banking sector
It has been almost five decades since Indira Gandhi nationalised banking in 1969, with the intention to improve lending in ‘strategic areas’, but since then the banking story of the country only got worse.
However, the Modi government has been trying every trick on the book to refurbish the banking sector and improve the situation. For the last few years, the Finance Ministry is trying to infuse private energy in the banking sector by expanding the area of operations of the private banks as well as with privatisation of inefficient public sector banks.
Read more:To stop public sector banks from becoming a liability, the government comes up with a solution
Moreover, to enhance the efficiency of the banking sector, the government also allowed all private banks to participate in its businesses. This helped in opening up newer avenues of opportunities for the smaller private sector banks that offer niche services but are not allowed to participate in the government business due to their small size.
Despite this, the graph rate for PSBs growth is quite slow. Thus, it has become necessary to private all banks except SBI and the government needs to take decision in the right direction as soon as possible.
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