Privatisation of Nationalised Banks: One stop solution?

Privatisation is a complex and multi-faceted issue, get the complete picture here

Of late, privatisation of nationalised banks is being touted as a one stop solution to the evils of rising NPAs, bad loans and other inefficiencies in the banking sector. However, this debate is typically one-sided and does not do justice to this complex issue.

A good solution to any problem requires, first and foremost, that the problem is thoroughly analysed and the root causes are identified. But, the shrill voices that demand privatisation of nationalised banks do not explain what the root causes of the current round of banking sector problems are. They also do not even attempt to explain how privatisation would put an end to these problems.

Many of these voices also recommend that the chairperson of nationalised banks should be someone picked from the private sector. It is claimed that this too would be able to resolve the problems that nationalised banks face. However, in the case of Air India, a similar move (of bringing in someone from the private sector to head the airlines) has not yielded desired results and has not succeeded in turning around the airlines and making it profitable.

It is generally claimed that Air India suffers from a multitude of problems – as a government owned entity, it is required to operate many unprofitable flights in order to meet the government’s social obligations; there is political interference in its functioning; workers’ unions exploit the airlines; many workers, especially at the lower levels; are grossly overpaid and are far less productive than their private sector counterparts. Now, it is easy to see that these problems are systemic issues and merely bringing in one person at the top cannot resolve these issues. Even if the airlines is privatised, it may still be subject to political interference and workers’ unions related issues.

Similarly, in the case of nationalised banks, there are a multitude of issues that these banks face. First, they are required to operate many unprofitable branches in rural and semi-urban areas in order to meet the government’s targets of making banking more accessible to people. Then, they have to contend with priority sector lending regulations and welfare oriented lending regulations. In fact, some of the largest bad loans come from priority sector lending. Workers’ unions and overpaid junior level staff (especially when compared to the private sector) are a reality for the nationalised banks as well. These are systemic issues and need long-term solutions. A knee-jerk reactionary privatisation is not going to resolve these problems.

Another point that needs to be noted is that private sector banks too suffer from many problems. The central bank, RBI, has often upbraided many private sector banks for not following norms properly. On many occasions, even fines and penalties have been imposed on these banks. In fact, nationalised banks have a far better track record than private sector banks in this regard. Thus, it would be presumptuous to say that merely privatising nationalised banks will make them more efficient and profitable. What is needed is a more thoughtful approach.

First and foremost, private sector banks should be given the freedom to hire and fire workers, especially at lower levels. Individual banks should be given the freedom to fix salaries at market rates rather than follow universal government mandated rates. Secondly, priority sector lending and welfare based lending should be handled by specialised and dedicated institutions rather than by commercial banks. These are the changes that the Indian banking sector, and the economy in general, desperately need.

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