Gradual rather than big bang approach for banks' privatisation for better outcomes: RBI article

Mumbai: RBI on Friday said a research paper favouring gradual privatisation of Public Sector Banks (PSBs) is not its view but that of the authors of the report.

The research paper published in the August 2022 issue of RBI Bulletin said "the gradual approach to privatisation adopted by the government can ensure that a void is not created in fulfilling the social objective of financial inclusion".

The article also highlighted that recent mega merger of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks.

In 2020, the government merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12.

United Bank of India and Oriental Bank of Commerce were merged with Punjab National Bank; Syndicate Bank was amalgamated with Canara Bank; Allahabad Bank was amalgamated with Indian Bank; and Andhra Bank and Corporation Bank were consolidated with Union Bank of India.

In a first three-way merger, Dena Bank and Vijaya Bank were merged with Bank of Baroda in 2019.

Prior to this, the government had merged five associate banks of SBI and Bharatiya Mahila Bank with the State Bank of India.

Evidence suggests that public sector banks are not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks, the article titled 'Privatisation of Public Sector Banks: An Alternate Perspective' said.

"A big bang approach of privatisation of these banks may do more harm than good. The government has already announced its intention to privatise two banks. Such a gradual approach would ensure that large scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission," it said.

Thus, the researchers are of the view that instead of a big bang approach, a gradual approach as announced by the government would result in better outcomes, it said.

The central bank said the views expressed in the article are of the authors and do not represent that of the Reserve Bank of India (RBI).

While private sector banks (PVBs) are more efficient in profit maximisation, their public sector counterparts have done better in promoting financial inclusion, the article in the latest RBI Bulletin said.

"Privatisation is not a new concept, and its pros and cons are well known. From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it," it said.