On a Downward Trajectory: The public sectors banks in India

In the list of failed public sector companies in India, the failure of public sector banks has been quite prominent. After the Nirav Modi scam worth INR 13,000 crore, there has been a growing outcry from industry specialists to privatize the public banks. The total value of the non-performing assets of public sector banks is around 2,53,000 crore. According to industry specialists, there is rampant mismanagement among public companies leading to their failure. This was seen in case of Air India as well. The market share of PSB’s is said to be falling at 4% per year. As a result, in the next 50 years, their market share will fall to a paltry 10% , which is significantly lesser compared to the current market share of 70%. Hence, an argument can be made for public sector banks to be sold to private companies willing to invest in it as soon as possible to ensure their values are retained. Moreover, if we look back to history, we see a similar trend with BSNL, where its market share had fallen completely and there was no likelihood of its ever getting privatized. However, is the incentive to privatize public sector banks really that high and will it solve the problem of non-performing assets?

Bad debts are not limited to public sector banks, they exist in private sector banks as well. Moreover, according to industry specialists, most of the companies scamming public sector banks are private companies. Here the efficiency of private sector companies is put to question. If private sector companies can fail, so too can private sector banks. It is also to be noted that only the Non-performing assets of five public sector banks (PNB, SBI, BOI, BOB, IDBI) are very high. The total non-performing assets of ICICI Bank are more than those of 16 other public-sector banks combined. Hence, the problem is more widespread than previously imagined. Moreover, the schemes introduced by the government like the Jan Dhan Yojna which aim to increase inclusivity in the financial system would not have worked only with private sector banks. Some people point out that private sector banks have low incentives to include the lower income households. For example, families cannot start a bank account with merely Rs 200. However, the public-sector banks offer such facilities because they have the incentives. It could be argued that private sector banks merely exist for the middle and high-income households.

The Finance Minister has ruled out the privatization and mergers of public sector banks for the next one year, further fuelling the dissatisfaction of the taxpayers who do not seem happy with this move. This decision is taken in an attempt to make the public-sector banks stronger so that they can fetch the right price. If after a year, these banks are privatized, regulation of private banks could increase to ensure that the social initiatives taken by banks are met. However, privatization alone will not solve the banking crisis in India. There is mis-selling of products that takes place at banks where banks have the incentive to increase their own income by selling financial services which give them more commission. This was seen in case of the ICICI bank in Rajasthan where customers were advised to buy insurance products rather than fixed deposits. Hence, banks may have incentives to earn more profits themselves and not deliver complete risk information to customers. Such episodes by private banks need to be regulated by the government to make the banking system more efficient.

If the public-sector banks are not privatized soon, they may lose in the fast pace of technological innovation that is taking place in the financial sector. This will drive the loss of market share in public sector banks to be greater than 4%. Public sector banks do not have the resources to make such technological changes which are required in the fast-moving industry. Without these changes, the value of public sector banks will dip.

To tackle the problem of failing public sector banks, the government must privatize them as soon as possible. This not only saves the taxpayers money but also saves the market share from dipping. After privatization, the banks should be regulated better by the RBI and cases of misinformation between bank personnel and customers should be handled. Without appropriate regulation in this sector, even private banks could collapse. Financial inclusivity is just another excuse, with appropriate policy making, the government can incentivise and regulate private banks to increase inclusivity in the financial sector.

 

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Vidhi is an Economics and Finance major and is in her third year at Ashoka. She is interested in Macro-economics and believes that good economic policies can change the face of the nation and improve the quality of life of millions. She is also a trekking enthusiast and absolutely loves to travel. Mountains are the love of her life. Simplicity in people baffles her.

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