Does Privatization of Banks hold key for the problems haunting Indian Banking Sector?

Published: March 29, 2018

Indian Banking sector is being haunted with various issues like increasing NPA, Frauds with letter of understanding for overseas loans etc. But the Privitisation is not a remedy for any of the issues of the Indian banking sector because

  • Indian experience with the Privitisation of Banks is not very encouraging. Of the ten private sector banks given licenses in the new economic regime after 1991, three (Times Bank, Centurion Bank, Bank of Punjab) merged with other banks. Since no private sector bank was big enough in 2004 to take over Global Trust Bank, it was ultimately amalgamated with a PSB, the Oriental Bank of Commerce (OBC). Another, IDBI Bank was converted into a PSB.
  • Similar is the International experience. Crisis in Mexico, South-east Asia, Brazil have shown that the private banks doesn’t offer any explicit benefits to deal with banking problems.
  • Aftermath of the economic crisis of 2008 it was the private banks which were either failed, were distressed or were merged.
  • China model shows how the state banks can function robustly and contribute significantly to the growth of the country. Similar is the experience with other BRICS countries which have a significant contingent of state-owned financial institutions.

On the other hand there are numerous instances of PSBs turning out to be good tools to fight financial crises. It’s not that public sector banks in India were always in a precarious situation.
In the first of a comprehensive review of PSBs held in 1993, many were found to have been saddled with huge NPAs. With reasonable levels of fiscal support, opening them up to competition, evaluating them on efficiency parameters and providing access to public capital markets, India was able to revive and resurrect public sector banks. In a short period of time, they emerged as favorites of the stock markets with highly liquid indexes (BankNifty/Bankex) in India’s bourses. Therefore India needs to build on its previous experience and strengthen the banking sector of the country to pull them out of crisis.

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