Big-bang privatisation of PSUs can be harmful, says RBI article

A gradual approach to privatise public sector banks (PSBs) is more ideal than taking a big-bang approach, a study by Reserve Bank of India (RBI) staff has concluded.

It has backed the government’s idea to privatise two PSBs initially. Such a gradual approach would ensure that large-scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission, the study has argued.

“…a big-bang approach of privatisation of these banks may do more harm than good,” the study said.

PSBs, unlike the private sector banks, are not entirely guided by the profit maximisation goal. Rather they have integrated the desirable financial inclusion goals in their objective function.

The study has found that labour cost efficiency is higher in PSBs in comparison to private banks. Also, empirical evidence has suggested that lending by PSBs is less procyclical than private banks. Thus, PSBs help counter-cyclical policy actions to gain traction.

PSBs have weathered the storm of Covid-19 pandemic well, despite constant criticism of their weak balance sheets. “Recent mega mergers of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks,” the study said.

The state-run banks have gained greater market confidence in recent years and the establishment of the National Asset Reconstruction Company (NARCL), or popularly known as the “bad bank”, will help them in cleaning up the legacy burden of bad loans from their balance sheets.

“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. Overall, these reforms are likely to help strengthen the PSBs further,” the study said.

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