Public Sector Banks Should Operate Like Proper Banks

Context: Recently, Bank unions plan to go on a strike to oppose the planned privatization of public sector banks (PSBs) have sparked the debate over benefits of privatisation.

Concerns with PSBs in India 

• Performance is not at par with private banks: in terms of taxpayer money investment (Rs 4.3 trillion is invested as equity – Economic Survey) in PSBs.
• Investment in PSBs lost 23 paise whereas gained 9.6 paise in private banks (after 1991).
• Despite bigger assets, market capitalization of all PSBs (Rs 6.41 trillion) is lower than HDFC bank (Rs 8.56 trillion).
• Dual regulation of PSBs: both by Reserve Bank of India (RBI) and department of financial services under finance ministry whereas only RBI regulates private banks.
• P.J. Nayak Committee report pointed that the finance ministry issued 82 circulars to PSBs (between October 2012 to January 2014).
• Operate as government organisation: to fulfil social obligations and pump-prime economic downturn, resulting in lower investor’s confidence and valuation. 
• Stock market discounts these factors while valuing PSBs.
• Declining share in India’s total outstanding loans: from 75.1% in 2010 to 57.3% in September 2020. 

Way Forward: Operating PSBs as proper banks irrespective of whether they are privatized or not could have following benefits-

• Help them raise more capital: by reducing the government’s stake to 33% if PSBs are not privatized.
• Increase market capitalisation: investors seeing PSBs being run as proper banks and not as government organisation will increase their confidence and valuation of PSBs.
  • Policies for regulating and promoting industrial growth devoid of social content (suggested by R.C. Bhargava) can raise valuation of PSBs.
• Incentivise all banks: after increased valuation of PSB by stock market, government can sell some of its stake in them every year to incentivize all banks, not just PSBs, to fund social objectives.
• Foster competition: between PSB and the private sector will improve banking service delivery.