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Bank privatisation should be gradual, motes RBI paper


Bank privatisation should be a gradual process as big-bang sales of public sector banks can do more harm than good, a Reserve Bank of India (RBI) paper said.

The paper argued that while private sector lenders are more efficient in profit maximisation, public sector banks (PSBs) have done much better at promoting financial inclusion, delivering farm loans and achieving monetary transmission, which are key objectives of both the government and the RBI. The government had announced a plan to privatise two state-owned banks in the FY22 budget.

“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,” said the paper authored by Snehal S Herwadkar, Sonali Goel and Rishuka Bansal of the RBI’s banking research division.

A recent policy paper by former Niti Aayog vice chairman Arvind Panagariya and Poonam Gupta, a member of the economic advisory council to the Prime Minister, had called for the privatisation of all PSBs except .

‘More Welfare Enhancing than Private Peers’

Gupta is also the director general of National Council of Applied Economic Research (NCAER), an economic policy research think tank.

“An important aspect that is often ignored by researchers proposing privatisation is the role played by PSBs (public sector banks) in financial inclusion,” the RBI paper said. “An alternate perspective provides empirical evidence on how PSBs have been more welfare enhancing than their private sector counterparts in India.”

When the objective function is changed to include financial inclusion–total branches, agricultural loans, priority sector advances–PSBs prove to be more efficient, it said.


The views expressed in the paper are those of the authors and do not represent those of the RBI.

Providing empirical evidence, the paper said that lending by government-owned lenders is more pro-cyclical compared with private sector peers and thus they help the countercyclical monetary policy to gain traction and contribute more to macroeconomic stability.

Several recent research efforts suggest that private ownership alone does not automatically generate economic gains in developing economies, the paper said. It has also often been argued by economists that government-owned banks contribute more to economic development and improve general economic welfare, it added.

The privatisation of public sector banks has long been viewed as a key area of pending reforms in India. The paper, after empirically examining the performance of PSBs, found that the labour cost efficiency of PSBs is higher than that of private lenders. This implies that state-owned banks can incur lower labour costs and generate higher levels of output.

With the recent mergers of state-owned banks, along with efforts to clean up balance sheets and legacy bad loans, the PSBs are now on a much stronger footing and therefore the government should not rush bank privatisation, the paper added.


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