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.