An article in the latest RBI bulletin on the privatization of public sector banks (PSBs) has ended up playing the role of being a cat among pigeons. This has made the RBI issue a clarification that the article reflects the views of the authors and not that of the central bank.
The RBI has pointed out that the article was against the big bang approach to privatization which could do more harm than good. A gradual approach will ensure that large-scale privatization does not create a void in fulfilling the social objectives of financial inclusion and monetary transmission.
The matter has triggered a controversy, with Congress claiming that the Centre had pressured the RBI to “disown” its own research. The Opposition party has called upon the government to publish a White Paper which will clarify where exactly the government stands. Before we go into what the article said, it is important to remember that its findings are based on strong statistical research and that in tone and content, the article is not an opinion piece per se.
To begin with, the current government is indeed in favor of rolling back the footprints of an overextended public sector and has announced its plan to privatize two PSBs in the current year. But it has also clarified that it will not totally exit the strategic sectors where at least one public sector entity will remain. This is expected to be achieved in the banking sector with the State Bank of India remaining under public control.
The article begins by noting the role that the PSBs have played in taking forward financial inclusion. The PSBs have the largest share of branches in rural and semi-urban areas. They also dominate in meeting the credit demand of rural areas.
Their share of ATMs in rural areas is more than twice that of the private sector banks and their share of business correspondents in rural areas has consistently remained above 60 percent. Banks were nationalized in the first place because they had till then, the 1960s, served only metropolitan areas.
A key developmental initiative of the government is the Pradhan Mantri Jan Dhan Yojana which seeks to offer universal access to banking, with every household having at least one basic bank account. The PSBs are host to 78 percent of such accounts.
Importantly, private banks have met their priority sector lending targets not by lending directly in sectors like agriculture and small and marginal farmers but by buying priority sector lending certificates.
These are issued by the PSBs against their own priority sector lending portfolios in excess of the mandated levels which are, thereby, in a sense, refinanced. Private banks don’t mind paying a premium on these certificates instead of actually going out and engaging in priority sector lending. A key argument used in favor of privatization is that the staff in private banks are more efficient than their PSB counterparts. The statistical analysis used by the article indicates that the labor cost efficiency of PSB staff is higher than that of private bank staff.
The article says that by “incurring lower cost on labor, PSBs can generate higher levels of output.” This may have been achieved through the effective use of the banking correspondents model and other cost-efficient techniques. The statistical exercise sought to measure output against the input. The output consisted of deposits, advances, non-interest income, and investments. Input consisted of staff costs, rent, lighting, insurance, taxes, and other administrative expenses. The measure deployed was output achieved per unit of input.
Anecdotal evidence indicates that private bank staff treats customers across the counter better. On the other hand, the private banks pick and choose their customers who have a relatively higher net worth and, therefore, are fewer in number and easier to give service to.
