Chennai, August 19: The privatization of public sector banks (PSB) should be made in a gradual manner since they are fulfilling important social objectives, said senior officials of the Reserve Bank of India (RBI).
Large-scale privatization of PSBs or the big bang approach will do more harm than good, said Snehal S. Herwadkar, Sonali Goel, and Rishuka Bansal of the Banking Research Division, Department of Economic and Policy Research, in an article published in the RBI’s monthly bulletin.
“The government has already announced its intention to privatize two banks. Such a gradual approach would ensure that large-scale privatization does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission,” they said.
Giving a thumbs up for the recent mega-mergers of PSBs they said it has resulted in the consolidation of the sector, creating stronger and more robust, and competitive banks.
The establishment of National Asset Reconstruction Company Limited (NARCL) will help in cleaning up the legacy burden of bad loans from their balance sheets.
The recently constituted National Bank for Financing Infrastructure and Development (NBFID) will provide an alternate channel of infrastructure funding, thus reducing the asset-liability mismatch concerns of PSBs.
Overall, these reforms are likely to help strengthen the PSBs, the three RBI officials said.
Post global financial crisis (GFC), there has been a renewed interest in the public ownership of banks as many high-income and developing countries capitalized or nationalized stressed banks. According to the three RBI officials, the important aspect that is often ignored by researchers proposing privatization is the role played by PSBs in financial inclusion with their branches in rural and semi-urban areas.
The PSB’s share in ATMs in rural areas is more than twice that of private sector banks.
According to the three authors, granular data show that the private banks meet their priority sector targets not through organic lending but through investment in priority sector lending certificates (PSLCs), especially in agriculture and small and marginal farmers categories.
They said the PSBs are more efficient than private sectors when the objective function is changed from profit maximization to including financial inclusion, like total branches, agricultural advances, and priority sector lending.
According to them, the PSBs are also more effective in monetary policy transmission, aiding the countercyclical monetary policy actions to gain traction.
During the last easing cycle, for example, their reduction in lending rates was substantially higher than that of private banks, the article states.
As regards the customer confidence in banks, the authors said deposits typically flew to stronger banks, both in the public and private sectors when concerns were there in the banking sector.
They said investors and depositors value the health of banks much more as compared to implicit government guarantees while placing their trust.
It can also be argued that during such stress periods if stronger PSBs had not existed, the destabilizing impact on the banking sector and the economy would have been much greater.
Higher resources raised by PSBs as compared to private banks in recent years also provide a testimony of growing market confidence in them, the RBI officials said.
