After Merger privatising of PSB govt would need to consider

Privatising PSBs

Issues related to consolidating the Indian banking sector have been debated for years. Mergers have been a preferred suggestion. In India, many banks in the past were merged with other banks. New Bank of India and Punjab National Bank, both PSBs, were merged in 1993. Recently, the Government announced the merger of State Bank of India and its associates.

Mergers can be successful in similar institutions with a similar culture, but cannot be extensively adopted because it leads to job cuts, branch closures and in some cases, a lowering of the quality and quantity of services. Hence, in addition to mergers, the Government would need to consider other alternatives.

The government could explore setting rigorous standards for banking industry — privatising some of the inefficient loss-making PSBs while rewarding profit making PSBs. Many countries have privatised their nationalised banks, including some from the erstwhile Eastern bloc countries. Argentina, Australia, Brazil, Bulgaria, Chile, Denmark, Egypt, Finland, France, Hungary, Indonesia, Italy, Korea, Mexico, Norway, Poland, Peru, Spain, Sweden, Tanzania, Turkey, Venezuela and many more have privatised their banks over the years.

The method of privatisation has varied across countries, especially in transition economies of former Soviet Union where voucher privatisation was undertaken with an objective of egalitarian distribution to citizens. In Finland, the method was privatisation by asset sales.

The most widely used method is by offering an IPO which serves to foster capital market development. But widely held ownership has the drawback of not providing strong oversight of management by a significant shareholder. It may not ensure strong management and robust internal systems. Further, in countries with small and emerging capital markets there is a chance of market manipulation, too. Better financial performance is ensured when a strong financial institution is involved as a significant shareholder in privatisation.

The social angle

Privatisation implies that the 60-year-old policy of social control needs to be reviewed. In India since 1991, PSB have been tapping the capital market, but have not been privatised. In 1999, after review, privatisation was considered impractical and expensive due to inability to attract private investors as well as cost of restructuring.

Privatisation of PSBs is not going to be easy, as it would involve building consensus amongst various stake holders, including unions and parliamentarians. The decision to privatise inefficient PSBs, consistently delivering negative returns, would require wide debate.

Therefore, it would be useful to have a high-powered, government-appointed committee, to devise exact criteria, modus operandi, the type of privatisation model to be adopted, and engage with the social ramifications before privatisation is actually undertaken.

In India, PSBs enjoying a gilt-edged status, should serve as benchmarks for the banking sector. To ensure that PSBs work at their efficient best, given that tax payer’s money is at stake, there is need to establish very high standards; else, privatisation should be an alternative. As Planning Commission was the vestige of socialist pattern of society, so is social banking. And the time to revisit it is now!