Privatization of Indian public sector banks
A report has been released in which it is mentioned that the state banks of the country i.e. the public sector banks, rather than the State Bank of India, are in the process of being privatized.
The National Council of Applied Economic Research (NCAER) has published a report on the privatization of the public bank. The National Council of Applied Economic Research (NCAER) is India’s oldest and most authentic economic policy research organization. thinking group. Their main objective is to do research in the field related to economics. They collect the data and provide an accurate report. It was launched in 1956 in New Delhi. The National Council of Applied Economic Research (NCAER) is one of the best think tanks in the world that has done a lot of in-depth analysis and policy dissemination. This organization carries out an in-depth analysis of all areas related to the economy.
Two economists, Arvind Panagariya, the vice president of Niti Aayog, and their president Poonam Gupta launched this report. In this report, it is mentioned that central banks should privatize all public sector banks (PSB) except SBI (State Bank of India) because according to the report, private sector banks have emerged as a good alternative in recent years. time. The private sector is doing valuable work, and tremendous growth has been seen in this sector.
Here, the report indicates that there is not much need for public sector banks due to the problems encountered. The Reserve Bank of India faces the problem of maintenance and management. It is therefore preferable to privatize public sector banks.
Public sector banks are lacking in the race compared to private sector banks. This can be clearly evidenced over the past decade. The return on private sector assets, equity and counterparties is meager.
Return on assets refers to the return that the company gets on its assets. For a bank, the assets can be the loans it gives to the general public because on this loan the bank will get the interest which is the returns for the bank. Here in the public sector, most loans become non-performing assets (NPA), which is a serious problem for banks, especially for the public sector.
Public sector banks had lost ground to private banks in deposits and loans. Since 2014-2015, the role and contribution of private sector banks has been relatively high in the growth of the banking sector, while in the case of public banks, only the contribution of the SBI (State Bank of India) is visible. Underperforming public sector banks are continuously on the rise.
Many measures have been taken by the government to improve the conditions of the PSOs, but the underperformance of the PSOs persists. Measures include:
- Bank Board Office
- Quick corrective action plans
- Consolidation by mergers.
Even after taking these appreciable steps, the performance of public sector banks remained sluggish.
If we compare non-performing assets (NPA) with private banks, it continues to be at a high level. Many NPAs can be seen in PSBs even after infusing $65.67 billion from the government. Between 2010-2011 and 2020-2021, the government gave $65 billion to all public sector banks, but despite this, the NPA seems to be constantly increasing.
Even after investing huge capital in PSBs, the market valuation of public sector banks is insignificant. Market valuation refers to the value of a business. The government recapitalization amount is worth $43.04 billion, but the market valuation is only $30.78 billion. This shows that the stock market valuation was even lower than the recapitalization value.
Even if the government invests more capital in public banks, initially, looking at past performance, it won’t be worth it; public banks will not contribute to economic growth. It is therefore better to privatize the PSBs.
Which bank to privatize first?
The report advised that the banks should be privatized, but the big question is which bank should be the first to privatize. Thus, it is mentioned in the report that the two banks which are in a better position compared to other public sector banks by having the highest return on assets, the lowest NPA (non-performing assets) in the last five years and weak government shared ownership compared to other public sector banks will be easier to privatize first.
If the bank that was not performing well is privatized first, it will lose morale and the other public sector banks will not be privatized. Thus, the bank with good performance will be privatized first to set an example for the rest of the banks.
The Niti Ayog report suggests that the Central Bank of India and the Indian Ocean Overseas Bank should be privatized first. But according to the National Council for Applied Economic Research (NCAER) report, Indian Bank and Baroda Bank should be privatized first.
Between these two, Baroda’s bank would be easier to privatize since the government will only need to embezzle 15% to lower its stake below 51%.
Strategy: Suggesting the selling strategy, the reporters said that if the government decides to keep its stake close to 50% on the 15th of every month, it can sell its stake in the open market on the 15th of a month to reduce its stake to 50%. . .
Edited by Prakriti Arora