Banking Sector Reforms

PSBs should operate like proper banks if they can’t be privatized

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Privatisation of PSBs

The article deals with the stark differences in the performance of the public sector banks (PSBs) and private banks and suggests ways to deal with the issues.

Comparing PSBs with private banks

  • The performance of PSBs over the years hasn’t been worth the money that the government has invested in them.
  • As the Economic Survey of 2019-20 pointed out that over 4.3 trillion of taxpayer money is invested as government’s equity in PSBs.
  • In 2019, every rupee of taxpayer money invested in PSBs, on average, lost 23 paise.
  • In contrast, every rupee of investor money invested in New Private Banks—banks licensed after India’s 1991 liberalization—on average gained 9.6 paise.
  • The combined market value of HDFC Bank’s shares is 8.56 trillion (as of 18 February), whereas the market capitalization of all PSBs is around 6.41 trillion (excluding IDBI Bank, which is now categorized as a private bank).
  • Of course, if we add up the assets of PSBs, they are a lot bigger than HDFC Bank’s.

Dual regulation

  • The private banks are regulated by the Reserve Bank of India (RBI).
  • PSBs are regulated both by RBI and the department of financial services under the finance ministry.
  • The P.J. Nayak Committee report of May 2014 had pointed out this issue of dual regulation.
  • This is primarily because PSBs are used by the government to fulfil its social obligations and pump-prime the economy when it’s not doing well.
  • The stock market discounts these factors while valuing them.

Way forward

  • The policies for regulating and promoting industrial growth do not have any social content in them.
  • Hence, PSBs should be run as proper banks irrespective of whether they are privatized or not.
  • If they are not privatized, the government’s stake in these banks needs to come down to 33%, something which would help them raise more capital.
  • Once investors see PSBs being run as proper banks their market capitalization will start to go up.
  • Once PSBs are properly valued by the stock market, the government can sell some of its stake in them every year, and use that money to fund its social objectives.
  • It can also use some of that money to incentivize all banks, not just PSBs, to deliver some of its social objectives.

Conclusion

The government should take these steps to let the PSBs realise their potential. At the end of the day, nothing improves service delivery more than some good competition.

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