Make That Withdrawal

Context: There are certain things to take care of while going for the privatization of Public Sector Banks (PSBs).

Arguments favouring privatization of Banks

• To reduce state presence: Public sector banks (PSBs) 60% of the assets and have typically had more than 75% government ownership.
  • Public Sector Banks (PSBs) are often nudged by government to make unviable loans (subsidies).
  • The banks recoup expected losses through a higher average interest rate on loan, which restricts the borrowers, impacts the macro-economy at large.
• For efficient allocation of scarce capital: Lending decisions of competitive private banks will be based on the creditworthiness of borrowers, which will result in allocation of scarce capital efficient.

Way forward: For successful privatization of PSBs

• Selling the shares: Mutual Funds (MFs), pension funds, insurance companies on behalf of their investment portfolios, and foreign institutional investors shall be allowed to buy the shares of PSBs. 
  • Sale of shares at prevailing market prices shields GoI from the criticism of underpricing, favouritism or crony capitalism.
• Develop key metrics of successful privatization:
  • Competitive industry
  • Good governance: predicated on the privatized entity’s ownership structure and the quality and independence of its management and board of directors.
  • Sufficient capital: to ensure the solvency of, and public confidence in, a privatized bank. 

• Utilize the human capital: Experienced and talented bankers inside and outside of India shall serve as managers and directors of privatized banks.
• Eliminate conflict of interest: Disallow industrial houses to gain control in private banks through Diffused Ownership, to eliminate controlling stake of an owner family, protecting minority interests.
  • E.g. stakes of large the United States and British banks are spread across several MFs and Exchange Traded Funds.