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bank divestment: ‘big-bang approach’ to privatise state-run banks will do more harm than good, says RBI

India’s state-run banks have gained greater market confidence in recent years and a big-bang approach to privatise these lenders may do more harm than good, the Reserve Bank of India said today.

The central bank also said that if the sole motive is not only profit maximization, then state-run banks have scored over the private counterparts in promoting financial inclusion and they help the countercyclical monetary policy action to gain traction.

“Public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike PVBs (private banks),” the central bank wrote in its bulletin published today.

Despite the criticism of weak balance sheets, the state-run lenders have weathered the Covid-19 pandemic shock “remarkably well” and recent mergers of PSBs have resulted in consolidation of the sector, creating stronger and more robust and competitive banks, said the paper authored by Snehal S. Herwadkar, Sonali Goel and Rishuka Bansal of RBI‘s banking research division.

The views expressed in the paper are those of the authors and do not represent that of the RBI.

The RBI’s so-called alternative views come amid strong beliefs that New Delhi will introduce a bill in the parliament that will facilitate privatisation of state-run banks. The finance ministry is also in discussions with the RBI, the banking sector regulator, on ownership and controlling stakes issues relating to privatisation. Promoters can currently hold a maximum 26% stake in private banks.

A recent policy paper by Poonam Gupta, NCAER director general & member of the economic advisory council to the Prime Minister and Arvind Panagariya, former Niti Aayog vice-chairman has called for privatisation of all public sector banks except


In the budget for FY22 presented on February 1, 2021,Finance Minister Nirmala Sitharaman had said the government will privatise two public sector banks, apart from

whose privatisation process is underway, and one general insurer.

In April 2021, the Niti Aayog had given its recommendations on the banks that should be privatised to the disinvestment department. Central

and have reportedly been shortlisted, but the names have not been made public. There hasn’t been much progress since then, according to people with knowledge of the matter.

“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 fi nancial inclusion and monetary transmission,” RBI said today.

In 2017, five associate banks and Bhartiya Mahila Bank were merged with the country’s biggest lender State Bank of India. In a mega consolidation in 2020, the government had merged 10 nationalized banks into four large lenders, thereby bringing down the number of PSBs to 12 from 27 in 2017.

Setting up of National Asset Reconstruction Company Limited (NARCL) will help in cleaning up the legacy burden of bad loans from their balance sheets and the recently constituted National Bank for financing infrastructure and development (NABFiD) will provide an alternate channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs, it added.

“From the conventional perspective that privatization 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,” the central bank said.

Privatisation of public sector banks has been widely viewed as a key area of ​​pending reforms in India. The paper, after empirically examining the performance of PSBs, found that the labor cost efficiency of PSBs is higher than that of private lenders. This implies that incurring lower cost on labour, SBs can generate higher levels of output.

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