Banking’s Game of Pretend

Context: A case for privatization of Banks.

Advantages of Private Banks in India over pubic banks:

• Enjoy continuing profitability: because of better net interest margin (3.4% vs 2.4%) for public banks and lower costs (a wage bill that is 8.7% of income vs 13.8% for public banks).
• More flexible They can change their cost and revenue structures, find the capital needed.
  • Thus they can continue to grab a bigger share than public banks and corner the most bankable sectors, the best loan clients and the cream of the deposit-taking business.
• Better position to provide loans: Due to their lower provisioning and better capital adequacy. The share of public sector banks declined from 72% to 60 % of banking assets, in five years.

Attempts to revive public sector banks: through the following measures:

• Recapitalization;
• Creation of Banks Board Bureau to select the best Chief Executive Officers (CEOs);
• Merger of weak banks with stronger ones;
• New disclosure norms to enforce transparent accounting;
• New bankruptcy process and Regulatory forbearance during the pandemic.
• Idea of Bad Bank: To take over the bad assets of public banks.
• Create a bank investment company (an arm's length structure): to hold the shares of government banks, thereby separating ownership of government banks from the government.

Way forward: Privatization of public banks by -

• Allowing large business houses and shadow banks to become banks. 
• Privatization of public banks through a two- or three-stage sale process: To avoid public suspicions.
• Shrink the balance sheet of public banks: for which buyers are hard to find.

Conclusion: We may get a healthy banking sector that properly serves the economy if it is mostly private, along with two or three large, better-run government banks.