Nearly three years after the government announced the privatisation of banks, the proposal remains a non-starter. So much so that it has yet to identify the lenders whose stakes will be up for grabs. The prevailing uncertain market conditions, weak investor appetite, and the fear of large-scale protests by employee unions are holding the government back from making its move. As per news reports, the government has directed Niti Aayog, which is preparing the list of contenders for privatisation, to keep five of the 12 PSBs, including behemoths SBI and Punjab National Bank, out of the privatisation plan. Given the forthcoming assembly and general elections, it will be interesting to see how the proposal will proceed.
Globally, the debate surrounding bank privatisations remains unsettled. If developed nations offloaded stakes in respective PSBs en masse a few decades ago, the trend reversed following the 2008 global financial crisis. For instance, in developing countries, the average share of assets held by government-owned banks fell from 40% in 1995 to 17% in 2008, and from 36% to 10% in high-income countries. However, public ownership increased as countries were compelled to nationalise stressed banks after 2008. As noted in one of the RBI papers, the share of banking assets held by countries like Iceland and the UK shot up by 10 percentage points in just two years between 2008 and 2010. Moreover, PSBs’ lending is counter-cyclical, adding to macroeconomic stability compared to private banks, which are pro-cyclical. PSBs’ role in the recent pandemic-induced economic stimulus package is still fresh to forget.
That said, deposit withdrawals following the collapse of Yes Bank and Lakshmi Vilas Bank indicate that even PSBs are no exception, notwithstanding the sovereign’s implicit backing. The RBI paper observed that depositors value banks’ health more than government guarantees. While consolidation created stronger PSBs and given the legacy bad loans are largely wiped out, the focus must shift to strengthening governance. PSBs have a higher share in overall banking metrics, yet their service delivery and operational efficiencies are far lower than private peers. Above all, private banks are driven by profit maximisation motives and rake in high net interest margins. The government must improve PSBs’ profitability first, which attracts investors, before firming up privatisation.