RBI Bulletin warns against random bank privatization

In the latest issue of the RBI Bulletin for the month of August 2022, one of the articles looks fairly interesting. It is a base case for the role of PSU  banks in the Indian economy, especially in the area of financial inclusion. The thrust of the article in the RBI bulletin is that the government must approach the privatization of private banks in a more calibrated manner, rather than adopting a big bang approach to converting these PSU banks into private banks. RBI has highlighted financial inclusion as a justification for this view.

In a sense, the RBI paper is correct in that it highlights the stellar contribution that PSU banks have offered in the area of financial inclusion via Jan Dhan accounts. In the absence of the PSU banks, the private banks would have never shown interest in opening so many zero balance accounts, which normally don’t even cover their cost. However, it was only due to the Jan Dhan program that the payment of benefits were automated, spillages were entirely or substantially stopped and the benefits reached the right people at the right time.

RBI has also pointed out that the two rounds of nationalization of the banks in 1969 and again in 1980 may be questioned in the modern context. But the proliferation of banking to rural and semi-urban areas would never have happened unless these PSU banks had taken upon themselves the responsibility of ensuring financial inclusion to the extent possible. Hence, the RBI has suggested that the answer is not a big bang approach to privatisation of all government-owned banks as it may do more harm than good for the economy.

The RBI has highlighted some very important factors why the approach to privatizing the PSU banks should be more calibrated and well deliberated.

a. The first reason cited is that the PSU banks are in a better position to enable financial inclusion, something very important in a country where still a large section of the population is unbanked.
 

b. Most PSU banks, according to RBI, has a better legacy of credit appraisal, better credit disbursal systems and also better systems of risk management. This enables them to have checks at multiple levels.
 

c. The RBI has also stated that most of the PSU banks have consistently proved themselves on efficiency parameters and have managed to do a better job of getting the most of their limited manpower and at a much lower cost compared to private banks.
 

d. The RBI has specifically noted that the private banks have failed to cater to the customers of the rural and semi-urban areas to date and as a result, the customers in such locations are relying heavily on PSBs for banking. That has been empirically proven.
 

e. RBI has also underlined in the bulletin that the PSBs are able to ensure policy rate transmission quicker and better and this was visible in the last cycle when credit had to be boosted. This is in sync with the counter cyclical approach of the RBI.
 

f. RBI has also made an important point that the basic levels of customer confidence is still much higher in the PSU banks than in private banks due to the government ownership. That advantage may be frittered away by big bang privatization.

The RBI has said that even operationally, the government has invested a lot of time and money in reviving these PSU banks through recapitalization over the last few years. Now they are in a more comfortable situation and there is no point in going and selling them now.  RBI feels that privatization may have its advantages but it is unlikely to offer an alternative to the financial inclusion benefits of PSU banking. The answer may not be take discrete options, rather adopt a more eclectic approach.