PSU Banks: The Need to think beyond privatisation

With the aim to promote socialism and align the banking sector with the government’s goals, the government of India nationalized the 14 largest private banks in 1969. Fast forward to 52 years, the government had announced in the budget its intention to privatize two public sector banks in 2021–22. This announcement was also accompanied by an announcement of creation of Bad Bank, to deal with the rising NPAs. These moves, coupled with other initiatives, signal the current government’s belief in finding market-driven solutions for NPA and deviates from the long-established socialist narrative.

The graph above shows the poorer NPA position of public banks but it hides as much as it shows.

However, the conception that PSU banks are unable to properly evaluate projects and handle NPAs may not be entirely right. Under the watchful eyes of RBI, through AQR, they are reporting a better quality of true state of affairs in their loans as compared to private counterparts (this can be seen in the case of Yes Bank, DHFL where there was gross under-reporting of NPAs). Though it may be true that few PSBs have a higher NPA ratio, they are also instrumental in financing social schemes and providing various loans like agricultural loans, fisheries loans etc. which private sectors are not keen on. If we look closely, as banks write-off legacy infra loans, the share of priority sector accounts in the gross NPAs is slowly rising (shown below).

PSU banks have been instrumental in expanding the banking and finance functions across India and are forefront in implementing government schemes. They can always be seen as a partner in India’s infrastructure push and socialist schemes, through amongst others, Priority Sector Lending. While it is easy to shift large bad loans to a bad bank, the same may not work for more granular priority sector advances. While the RBI has re-initiated discussion on securitization of smaller loans to strengthen banks’ books, regulations must be concretised before the share of priority sector NPAs catches up with their prescribed 40% share of all loans.

Beyond extending loans and advances, PSU Banks are a tool for the government to expand its reach in society and offer services like Direct Benefit Transfer to marginalized sections of society who don’t find private sector banks catering to their needs. The government should consider the public benefits which PSU provides and share alternative mechanisms to deliver these benefits if the PSUs are privatized. Additionally, it must, with the RBI, consider regulations beyond governance mechanism to achieve twin goals of financial stability and inclusion.

This article has been written by Piyush Modi, a PGP (2021–23) Student at IIM Ahmedabad . All the views expressed are his own.