Move to privatise banks: Why the proposal? What are the concerns?

Topics Covered: Inclusive growth and issues arising from it.

Move to privatise banks: Why the proposal? What are the concerns?

Context:

The Budget proposes to privatise two PSU banks this financial year.

Need for:

Years of capital injections and governance reforms have not been able to improve the financial position of in public sector banks significantly.
Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalisation and dividend payment record.
The government front-loaded Rs 70,000 crore into government-run banks in September 2019, Rs 80,000 crore in in FY18, and Rs 1.06 lakh crore in FY19 through recapitalisation bonds. In 2019, the government merged ten PSU banks into four.

Significance and implications of the move:

Privatisation of two public sector banks will set the ball rolling for a long-term project that envisages only a handful of state-owned banks, with the rest either consolidated with strong banks or privatised.

This will free up the government, the majority owner, from continuing to provide equity support to the banks year after year.

What are the issues plaguing PSU banks?

Compared with private banks, PSU banks continue to have high non-performing assets (NPAs) and stressed assets although this has started declining.
After the Covid-related regulatory relaxations are lifted, the government would again need to inject equity into weak public sector banks.

Nationalisation of Banks:

Then Prime Minister Indira Gandhi, who was also Finance Minister, decided to nationalise the 14 largest private banks on July 19, 1969. The idea was to align the banking sector with the socialistic approach of the then government. State Bank of India had been nationalised in 1955 itself, and the insurance sector in 1956.

Many committees had proposed bringing down the government stake in public banks below 51%: