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  3. Big bang privatisation of public sector banks can do more harm than good: RBI article

Big bang privatisation of public sector banks can do more harm than good: RBI article

19 Aug 2022 Evaluate

Big bang privatisation of public sector banks (PSBs) can do more harm than good, the Reserve Bank of India (RBI) article has warned asking the government to take a nuanced approach on the issue. It said while private sector banks (PVBs) are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion.

It mentioned ‘Privatisation is not a new concept, and its pros and cons are well known. From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it.’ It also said the gradual approach to privatisation adopted by the government can ensure that a void is not created in fulfilling the social objective of financial inclusion and monetary transmission.

Further, quoting various studies, it said, PSBs have played a key role in catalysing financial investments in low-carbon industries, thereby promoting green transition in countries such as Brazil, China, Germany, Japan, and in the European Union. It stated evidence suggests that public sector banks are not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks.

Besides, it said ‘Our results also point out the countercyclical role of PSB lending. In the recent years, these banks have also gained greater market confidence. Despite the criticism of weak balance sheets, data suggests that they weathered the Covid-19 pandemic shock remarkably well.’ Recent mega merger of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks.

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