The Finance Minister has announced in the budget for the coming year that two Public Sector Banks (PSBs) will be privatized. The policy of the Government in the last three decades of economic reforms was to sell a part of the shares in the Public Sector Undertakings (PSUs) including PSBs to the public while retaining the controlling share in its own hands. This is known as “disinvestment.” The Secretaries of the respective ministries, and more often than not, IAS officers continued to head the management of these PSUs. In contrast, the controlling shares of a PSU are sold to a particular private buyer in “privatization.” The management is transferred to the hands of the buyer and the Government interference in the affairs of the privatized company is ended completely.
Privatization of PSBs is important because the Government has been investing huge amounts in them every year in the last decade to keep these banks from collapsing. This is called “Capitalization” of banks, that is, augmenting the capital to compensate for the losses incurred by them. One aspect of this investment is to bring the capital of PSBs in line with the international norms. The other aspect is that this investment covers up the losses incurred by these PSBs. More capital is required because they have incurred losses and their existing capital has been wiped off. The present policy marks a departure because the Government will be able to earn monies by the privatization of these PSBs instead of having to invest more monies to keep them afloat. It is like an owner of four cars having to invest huge amounts every year to repair a decrepit car when she could have earned money by selling it off.
The first criticism of this step is that the money earned from privatization will be used to support the increasing consumption expenditures of the government such as paying higher salaries and dearness allowance to its employees. This criticism is only partially correct. The Government is expected to obtain a revenue of Rs 20,000 crores from disinvestment in the current financial year 2010-21. The target for the coming year 2021-22 is Rs 175,000 crores. There is an increase of Rs 155,000 crores in the revenue to be earned from this head. In tandem, the capital expenditures of the Government are targeted to be increased from Rs 430,000 crores in 2020-21 to Rs 554,000 crores in 2021-22 indicating an increase of Rs 124,000 crores. The targeted increase in receipts from privatization is only marginally higher than the targeted increase in capital expenditures. Indeed, it would have been better if the increase in capital expenditures was more. Yet, we should appreciate the Government’s efforts in this direction.
The second criticism of privatization is that the Government is stepping back from its responsibilities of “Welfare State.” The banks were nationalized in 1971 with the idea that private banks were not serving the rural areas and the poorer sections of the society. They were nationalized so that they could be directed to open branches in the rural areas and provide loans to the priority sectors. This objective has largely been fulfilled. PSBs are today providing services in interior areas. However, another problem has arisen. The PSBs are incurring losses due to inefficiency and corruption. And, the Government is investing money to keep them afloat. The people are being taxed to raise the money for this investment. In this way, the policy of nationalization has had a twofold effect on the people. On the one hand, the PSBs have provided services to them. On the other hand, the same people are taxed to make investment in the PSBs. On the whole, the backward areas and poorer people would not have benefitted much in my reckoning.
Truly speaking, it was not necessary to nationalize the banks in order to provide banking services to the rural areas. The Reserve Bank of India (RBI) had adequate powers to direct the private banks to open branches in the specified backward areas. The Government made a mistake in 1971. The private banks were nationalized instead of setting right this failure of the RBI to give suitable directions to them. In the process now these nationalized banks are incurring losses. We have fallen from the frying pan into the fire. The need today is that the RBI should strictly require the private banks to provide services in the rural areas along with privatizing the PSBs.
The third criticism of privatization is that private banks indulge in giving loans to the sister concerns of their owners. This is correct. However, the same problem exists in the PSBs. They provide loans to doubtful entities at the asking of the secretaries and the ministers coupled with corruption by the bank officials. The large Non-Performing Assets (NPAs) of PSBs have arisen in large measure due to such lending. The problem of “bad” lending, therefore, has no relation with the lender being a PSBs or a private bank. Both can equally be at fault. The solution of this problem, again, is for the RBI to vigilantly track the lending portfolios of the private banks and take proactive steps when they indulge in lending to their sister concerns or doubt about the viability of the borrowers emerge. The RBI has indeed behaved in this excellent manner in Yes Bank and other weak banks in the recent past. This proactive approach of the RBI must be strengthened.
The Finance Minister has to be congratulated that she had decided to privatize two PSBs. Knowledgeable sources indicate that two small PSBs could be privatized initially, so to say, to test the waters. The Finance Minister should move fast and take steps to privatize the major PSBs. The stock market conditions are favourable at the present. The saying goes, strike when the iron is hot. Let us not forget that the efforts of the Government to privatize Air India were put on the backburner, in part, because of the adverse stock market conditions. The Finance Minister must use the present buoyancy in the stock market to privatize the larger PSBs. That will provide the much needed revenues to meet the contingencies arising out of the Covid pandemic. The additional receipts from privatization should be used to make public investments in new areas such as genetics, big data and space research. This will lay the foundations of our technological prowess of India in the coming decades.
(The author is formerly Professor of Economics at IIM Bengaluru)