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Raghuram Rajan on Bank Privatisation- Will Centre sell PSBs to corporates?

Raghuram Rajan on Bank Privatisation- Will Centre sell PSBs to corporates?


  • GS 3 || Economy || Economic Reforms || Disinvestment

Why in the news?

As a section of public sector bank employees go on a two-day strike to protest against the privatisation of state-run lenders, they have got a formidable ally in ex-RBI governor Raghuram Rajan.

Present Context:

  • Rajan, in an interview to PTI, cast doubt on the successful privatisation of inefficient public sector banks and added that if they are sold to corporates, that will be a colossal mistake.
  • Adding that it will also be politically infeasible to sell any decent-sized bank to foreign banks

All about Privatization and Disinvestment:

Privatization in India:

  • Privatization in India is still at a minimalist level.
  • Privatization by way of sale of public sector enter prises is almost negligible while divestment is also existent by way of selling of a portion of shares of public sector enterprises.
  • Deregulation in
  • India was facilitated by laws like the Industries(Development & Regulation) Act, 1951 (IDRA), Monopolies& Restrictive Trade Practices Act,1969, (MRTPA), Foreign Exchange regulation Act,1973 (FERA), Capital Issues Control and technical scrutiny by the Directorate General of Technical Development (DGTD).
  • Post-independence, the Indian government adopted socialistic economic strategies. It was in 1980s, that Rajiv Gandhi initiated economic restructuring.
  • With the help of IMF, Indian government commenced a sequential economic reorganization.
  • V. Narasimha Rao brought in the revolutionaryeconomic developments with the help of Dr.Manmohan Singh.

Advantages of Privatization:

  • Microeconomic advantages:
    • State owned enterprises usually are outdone by the private enterprises When compared the latter show better results in terms of revenues and efficiency and productivity
    • Privatization brings about radical structural changes providing momentum in the competitive sectors
    • Privatization leads to adoption of the global best practices along with management and motivation of the best human talent to foster sustainable competitive advantage and improvised management of resources.
  • Macroeconomic advantages:
    • Privatization has a positive impact on the financial health of the sector which was previously state dominated by way of reducing the deficits anddebts
    • The net transfer to the State owned Enterprises is lowered through privatization
    • Helps in escalating the performance benchmarks of the industry in general
    • Can initially have an undesirable impact on the employees but gradually in the long term, shall prove beneficial for the growth and prosperity of the employees

Disadvantages of privatization:

  • Private sector focuses more on profit maximization and less on social objectives unlike public sector that initiates socially viable adjustments in case of emergencies and criticalities
  • There is lack of transparency in private sectorand stakeholders do not get the complete information about the functionality of the enterprise
  • Privatization has provided the unnecessarysupport to the corruption and illegitimate ways ofaccomplishments of licenses and business deals amongst the government and private bidders. Lobbying and bribery are the common issuestarnishing the practical applicability of privatization
  • Privatization loses the mission with which the enterprise was established and profit maximization agenda encourages malpractices like production of lower quality products, elevating the hiddenindirect costs, price escalation etc.
  • Privatization results in high employee turnoverand a lot of investment is required to train the lesser-qualified staff and even making the existing manpower of PSU abreast with the latest business practices
  • There can be a conflict of interest amongst stakeholders and the management of the buyer private company and initial resistance to change can hamper the performance of the enterprise
  • Privatization escalates price inflation in general as privatized enterprises do not enjoy government subsidies after the deal and the burden of this inflation affects the common man.

Need for Privatisation of PSBs:

  • NPAs: The financial system is overburdened with the non-performing assets (NPAs) and the bulk of which lies in the public sector banks.
  • Issue of Dual Control: RBI (under the RBI Act, 1934) and the Finance Ministry (under the Banking Regulation Act, 1949) have dual control over PSBs.
  • As a result, RBI does not have any of the powers it has over private sector banks, such as the power to revoke a banking license.
    • Merge a bank, shut down a bank, or penalize the board of directors.
  • Lack of autonomy: Public-sector bank boards are still not properly professionalized, as board appointments are still made by the government (as the Bank Bureau board is not fully functional). This raises questions about politicization and interference with banks’ daily operations.
  • Differential Incentives: Different incentives drive private and public sector banks. Private banks, for example, are profit-driven, while PSBs’ business is hampered by government schemes such as farm loan waivers.
    • Also, the absence of large-scale frauds in private sector banks, such as the Punjab National Bank episode, can be explained by shareholders’ effective control over banks.

Major Concerns regarding Privatisation of PSBs:

  • Governance: A major problem in Indian banking is a lack of adequate governance, which affects both public and private entities.
    • Political interference occurs in the case of PSBs, while private banks are vulnerable to malpractices in the pursuit of their promoters’ interests.
    • The plight of YES Bank is proof that the problems of Indian banking go beyond issues of ownership.
  • Political Risk: There are many challenges to a privatization program, the most important of which is that every government faces significant political risks.
  • Issue with the policies: RBI-initiated restructuring schemes such as corporate debt restructuring, strategic debt restructuring, and schemes for sustainable structuring of stressed assets are the main reasons for delaying the identification of bad loans, regardless of bank ownership (public or private).
  • Unappealing Acquisition Targets: Banks would be unappealing acquisition targets for every private sector company, as many of them have bad loan books.
    • The government would almost certainly not get a decent price for them, potentially exposing itself to attacks from the political opposition; in some cases, it could be lucky to get some price at all.
  • It’s also worth mentioning that many banks are massively overstaffed or employ workers who are lowly productive; this surplus work is difficult for any acquirer to shed.
  • Any proposal for wholesale privatization would face a concerted campaign of resistance from bank employee groups with political clout.
  • Not a panacea: Former RBI governor Raghuram Rajan believes that privatization will not fix the banking sector’s problems unless it is followed by regulatory reforms.
  • Failing of regulators: While the RBI does not have the same level of control over PSBs as it does over private banks, this does not clarify why the RBI cannot keep PSBs responsible for issues such as capital adequacy, fraud control, or proper financial statement reporting. Under the RBI Act, the RBI is well-equipped to control banks.
  • PSBs as a Tool for Social Justice: PSBs serve as a tool for social justice by introducing a number of welfare initiatives such as financial inclusion, farm loan forgiveness, and so on.

Future prospects for India:

  • Globalization, liberalization and privatization are the key strategic mandates for economic policies. Market oriented reforms are sustainable and are gaining acceptance with resistance to privatization going down due to the benefits like enhanced efficiency through target oriented management and disposition of public funds into social and physical infrastructure of the country.
  • Privatization has shown great outcomes in the development of sectors like banking, insurance, telecom, power, civil aviation etc.
  • The lobbying in domestic circuits was enfeebled by the surprising reversal of the Indian economy in present time.
  • Bureaucracy, red tapism, political hiccups, corruption are also prominent hindrances in the development of India that offers ample of skilled and cheap labor and inadequate capita
  • With more liberal reforms in the making, future of privatization seems to be bright
  • and a salubrious flow of foreign investment and even development of domestic private players to take charge of the struggling PSUs and turn them around


Over the time, Indian policy makers have shed their inhibitions about privatization and have formulated liberal reforms to divest the huge capital investment in PSUs and enhance the efficiency and profit generation of the state owned enterprises. Many sectors wherein entry barriers were too high were loosened up to welcome investments from both domestic as well as international investors. Sectors that showed tremendous success after privatization are insurance, banking, civil aviation, telecom, power etc. However, complete privatization is still a far-fetched dream. In most of the liberalized sectors, government control is still evident and there is more of delegation or joint ventures between public and private sector are functional like Maruti Suzuki etc.

Mains oriented question:

Privatized banks have performed better as compared to the fully public sector banks in respect of certain financial performance and efficiency parameters. Justify the statement. (200 words)