The current crisis in the banking industry, according to the Parliamentary Standing Committee on Finance, is just temporary. Rather of using this temporary suffering as an excuse to privatise state-owned banks, it proposes that these institutions be given the tools they need to deal with the current problems. There are, however, counter-arguments to the views presented by the Parliamentary Panel.
Tough competition from private banks
Simply removing problematic loans from public sector banks’ records would not improve their efficiency. State-owned institutions may now have a distinct edge over private-sector rivals in terms of deposit acquisition, but they are losing market share. PSU banks’ deposit share decreased to 68.5 percent in FY20, down from 69.24 percent in FY19, while their loan and advance share fell to 62.1 percent, down from 63.9 percent. PSB loan growth was a meagre 3.2 percent in FY21, compared to 9.9 percent for private sector banks. In the coming years, technology will be important for banking, and the PSBs have delegated this responsibility to private-sector banks. In this light, the case for privatisation becomes more compelling. Finally, the most apparent requirement for survival and efficiency is expansion capital, for which most state-owned banks are reliant on the government. As a result, government funds will be required to capitalise them. Privatization is a better option.
Interference from the government will stifle their productivity
The greater issue, however, is government control and intervention, which prohibits PSBs from recruiting enough expertise to remain competitive in the present market. As a result, they will continue to be hampered by antiquated systems and procedures. Privatizing underperforming banks will relieve the government of its burden while also maximising resource use. When India’s economy was liberalised in 1991, it should have reversed the ill-advised bank nationalisation programme of 1969. Most PSBs still require assistance three decades later. They’ve squandered far too much government money; it’s time to let them go.