BFSI Insight Summit: Privatisation has to be path-dependent, say panelists

Though it is absolutely essential to privatise some public sector banks, we should also be careful that it is not done in a haste, said panellists at the Business Standard BFSI Insight Summit session ‘Bank Privatisation: Undoing 1969’.

The government’s approach towards privatisation should be path dependent, the panellists said.

“Today, our policy has to be path dependent. This government is very clear and earnest in its desire to privatise banks, but it cannot be a ‘jhatka’ activity,” said KP Krishnan, IEPF chair professor in regulatory economics at the National Council of Applied Economic Research.

Krishnan believes that the attempt, in terms of going forward, has to focus on efficiency and hence the scope for much greater private participation in Indian banking is huge. He says, "We should not completely denationalise but we should overwhelmingly privatise and then see how the situation evolves."

Echoing his views, SS Mundra, former deputy governor of the Reserve Bank of India (RBI), said the privatisation of public sector banks is a decades-long journey, and will not happen in a year or two. “There are several unknowns and this is not the area for drastic experiments,” he said.

Janmejaya Sinha of Boston Consulting Group said, when we are unwinding a system and want greater efficiency as well as stability, we need accentuated regulations, which can ensure that banks do not collapse. So, regulations need to run ahead. 

Union Finance Minister Nirmala Sitharaman in her Budget speech this year mentioned that apart from IDBI Bank, the government will take up the privatisation of two public sector banks and one general insurance company.

Also, banking was declared a strategic sector by the government under the new privatisation policy, which means the government will only have a limited presence in the sector.

After the government merged 10 state-owned banks into four last year, there are 12 public sector banks left.

“I am not a believer in full privatisation of the public banks sector. I have been a very strong advocate of the government being the single largest majority owner in a set of banks, with stakes of 26-30 per cent, and then having private banks as well as new banks joining the sector to keep the vitality of the sector alive,” Sinha said.

The advantage of government ownership is that depositors have huge confidence. On the negative side, there are a lot of rigidities and inefficiencies in the system. The quality of the board, rigidity in compensation structure, and human resources policies are some of them, explained Rajnish Kumar, former chairman of the State Bank of India.

“Today, the banking sector has the capacity to provide services at a much cheaper cost than what it was earlier. So, today, we can definitely debate with confidence whether we need public sector banks at all,” he said.

“Why should ownership be with the government? The RBI’s regulations are ownership neutral. So, what particular objectives do we have when we say we still need PSBs? The banking system is capable of delivering services to every corner of the country, riding on technology and business correspondent models,” Kumar added.

Mundra said the three basic reasons why banks were nationalised back in 1969 were: Major credit of the banks was going to crony capitalists, banking was not reaching the masses, and the farm sector was left out of formal banking credit.

However, these issues are not relevant today. The argument for privatisation is made on two counts — it will provide greater efficiency and will free the government of its obligation of providing capital to the banks and more often than not government finances are such that it is constrained to provide capital to banks for growth.

Mundra said more than efficiency, capital is the real issue. “Banks just don’t need the survival capital to keep them afloat. Banks would continue to need growth capital; profits alone will never suffice,” he said. He proposed various models that the government could explore when it comes to privatising the public sector banks and one of them was the IDBI Bank model.

“I don’t think the government is going to sell the banking sector lock, stock, and barrel. And, it would not be a very good thing to do,” Mundra added.