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Has the time arrived for privatisation of public sector banks?

The debate regarding socialism versus capitalism, public sector versus private sector has been a persistent one. Whether the state should restrict itself to main responsibilities (law and order, security and providing public goods) or should it also jump into address imbalances in society? After independence, India sought to emulate the Soviet model with the state taking up the responsibility of setting up industries, nationalised private enterprises (like banks and airlines) and took responsibility for the upliftment of poor. However, over a period of time, the socialist model collapsed and India had to go for market reforms and privatisation from the 1990s onwards.

One of the most controversial moves of the erstwhile socialist dispensation is nationalisation of private sector banks. It has been blamed for some of the deficiencies in the banking sector today. Some suggest that the state’s exit from banking business could solve many of the sector’s problems (including accountability and professional management).

Arun Jaitley ruled out any plans for privatisation of banks while speaking at the Global Business Summit that was held in February 2018. But he said that the mood or opinion in favour was gaining credence in the wake of large bank frauds. He added that a large political consensus was required to take up the matter. Jaitley mentioned the moral hazard of losing public money to private sector companies had been taken note of.

Arvind Subramaniam, the chief economic advisor in his recent statement told a channel that India needs to rethink public ownership of banks. While admitting that the governance problems of banks don’t go away with privatisation, they are exacerbated by the fact that the government stands rock solid behind these banks. No matter what the losses are, the banks feel they won’t be shut because of government ownership. The recent plan for recapitalisation of banks with 2.11 lakh crores is an example of the claim. Banks must live with the danger of failure or shutdown if they have to function in a professional manner.

In addition to this, political considerations are taken into account while allocating certain loans because of orders from governments. Privatising the banks would decouple their administration from the influence of the government or political parties in making business decisions.

India’s public sector banks are seeing a high level of stressed assets/ bad loans/ NPAs. The losses due bank frauds are also very high in the Nirav Modi case. Though political mudslinging is ongoing on these two issues, we need to see that the biggest loser is the taxpayer.

Thus, the government must prepare the ground for privatisation of banks in near future if not immediately. This would be a significant reform which will ensure that public money is not wasted if banks incur too much loss in future. Public funds must be used solely for defence, infrastructure and maintaining law and order in the long run (apart from some subsidies). It must not be wasted on sustaining banks which are facing many problems because of borrowers, market fluctuations, frauds, or mismanagement.

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