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The Public vs. Private Debate

by Tavaga Invest

The Public vs. Private Debate

The Historic Policy of 1991 unveiled

It was the year 1991 that coined up the word ‘Privatisation’ for the Indian Economy. Until then, each sector from Insurance, Agriculture, Hospitality, and Banking was under the rigid state norms. But the economic crisis left no option for the Government to open the Indian Market from its closed regulations. And then India pivoted to Liberalisation, Privatisation, and Globalisation which changed the fate of the Indian Economy for the good.

..but criticism over privatisation continues to this day

Out of the three norms, Privatisation received much criticism and it’s still getting debated over related to few industries and Banking is the foremost of all. Banking is the backbone of the economy which needs to be duly regulated but privatization of the banking industry gave birth to monopoly, unhealthy competition, strategic loopholes, and vague policies. All of these drawbacks stabbed the Indian Economy with repeated financial blunders such as ‘The Harshad Mehta Scam’ that took advantage of the tweaked policies for their own good.

Owning to all such obvious episodes from the past and even the current banking mishaps, the debate of ‘Public Vs Private’ in the Banking industry is still alive, and let’s uncover where it’s likely to be headed

The Public vs. Private Bank Debate

It was the former NITI Aayog Chief Arvind Panagariya who reignited the debate recently. In his argument, he proposed privatizing all the Public Sector Banks (PSBs) except for the State Bank of India (SBI).

His approach to proposing this ideology was based on the differing numbers between banks belonging to both sectors.

Private Banks edging over Public Banks

The economist favored privatization as it has floated many sunken ships in the past and recorded high numbers after conversion. For instance, one of the oldest Public Sector Banking players SBI had a Market Capitalisation worth 4,75,101 crore while it’s a much younger competitor but a Private player HDFC commands an almost double market capitalization at Rs. 8,40,185 crores. This gives the Private sector an edge over the Public sector and makes it appealing but why?

Why Privatisation sounds appealing?

Privatization was preferred highly, more because of the Public Sector Sufferings which include,

1. Banking frauds accounted for around 85% of the Public Sector Banking sector in the year 2019.

2. Constantly getting hit by massive NPAs and bleeding taxpayer money each year.

3. Pole apart the difference of taxpayer money invested. As per Economic Survey, for every 1 rupee invested in Public Sector Banks, a 23 paise loss was incurred. Whereas, Private Sector gave a 9.6 paise gain for the same amount.

4. Moreover, the credit growth of Public Sector Banks stood at a mere 4.03% whereas, Private Sector reported a massive jump of 20% during the 2010-2019 decade.

The India context

All of these numbers speak for themselves as to why is Privatisation appealed for Public Sector Banks. But for a developing country like India, where the ground reality strikes an absolute contrast with the soaring high numbers, it’s not practical to conclude on a sole basis. While PSBs might be seeming losing their ends, RBI still has rock-solid reasons to decelerate the pace of privatization and promote PSBs as it makes difference.

Where PSBs makes difference?

Though PSBs are losing the profitability indexes year by year, it’s achieving their foremost aim of Social responsibility of expanding banking ruraly. For this, it stands for around 20.6% share in the rural PSB ATMs which is 2X the private sector banks with 8.5%. Not only this, PSBs are leading into the rural lending space with a 65% share as against the mere 16% share of private banks.

On other hand, people still have a soft corner for PSBs and this was proved during the Covid-19 crisis and other geopolitical risks which threatened global financial security. When the pandemic was at its worst, PSBs saw an influx of Rs 58, 697 crores whereas Private Sector reported inflows of only Rs 33,878 crores. And this dependency of the Public over PSBs clearly can’t persuade RBI to privatize them.

The Bottom Line: RBI demands steadiness

RBI still believes in the potential of the Public sector and hence wants to decelerate its privatization process as against the Niti Aayog Chief’s appeal. In its paper titled Privatisation of Public Sector Banks: An Alternate Perspective ,RBI has clearly mentioned how Public Sector Banks (PSBs) are significantly better and more important when it comes to enhancing national financial inclusion. However development is also crucial for the economy as a whole to prosper and for that privatisation is the better option. We are thus at the crossroads with no simple yes or no answer to this ‘Public Vs Private’ debate with both the options seeming equally vital and reasonable from future aspects.

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