The case for privatizing public sector
banks (Live Mint)
Mains Paper 3: Economy
Prelims level: not much
Mains level: Bank privatization reason
Former RBI governor D. Subbarao raised the question of whether India
needs public sector banks at all in this day and age.
Reasons behind privatization
The country’s financial sector is now wide enough and deep enough to
take care of financial intermediation without state support.
Even after the bank nationalization of 1969, the state dominance of the
sector has kept competition levels low.
There was unnecessary micro-management by RBI, resulting in poor lending
decisions and market distortions.
Problem with interest rate benchmarking
Right now, banks are largely expected to do as they are told. Last RBI’s
directive to commercial banks to link their loan rates with its repo rate or
other external benchmarks need not be issued in truly free markets.
Competition for loan customers would not let a bank keep its lending
rates higher. Rivalry for deposits and other funds would mean a bank pays as
much as it could afford to.
To find the best way to gain an edge in a competitive market, banks
would turn efficient.
In India, state lenders are under little pressure to do this. Tough the
entry of private banks has upped service standards and induced some changes,
the sector is saddled with non-performing loans, inefficiencies and heavy
High state-controlled rates of interest on small saving schemes attract
a big chunk of people’s savings, leaving lenders short of money to lend and
paying too much for deposits.
Cause for privatization and challenges
The sector’s health requires banks to assess and price risks properly.
For this, bankers need to act diligently in the interest of profit-seeking
shareholders. This would be better enabled by privatization.
State’s exit could result in foreign equity control of banks and even a
loss of sovereignty.
Since large banks would be “too big to fail”, the government would still
need to bail them out in case they approach bankruptcy. This would involve
public funds and amount to the socialization of losses.
Close regulation would still be needed.
With all the challenges above, the state could argue it needs to retain
ownership control as well. Immediately, at least the appointment of public
sector bank chiefs must be freed of state control.
Q.1) Which of the following varieties of Assam tea set a new world record
as the most expensive tea for any public auction in the history of Assam tea? A. Pasuparai RD
B. Golden Butterfly
C. Manohari Gold Tea
D. Chamraj OP-Delight
Q.1) The proposition that the government should cede control of banking merits a
debate. Does the need for market efficiency outweigh the risk of private banks
needing a public bailout?