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Sunday, February 18, 2018

Privatisation: A bad solution for India’s banking problems

Its been the Ides of February for public sector banks (PSBs). First, Bank of Baroda faced questions on business practices and customers in South Africa. 

Next, the State Bank of IndiaBSE -2.55 % declared a quarterly loss, its first in 17 years. Finally, Punjab National BankBSE -2.10 % announced a $1.8-billion fraud, the net liability of which to the bank (and the banking system) is yet to be determined. Three of the largest PSBs with negative news have added fresh decibel levels to the clamour for reform of PSBs. 


And “reform” in the context of PSB usually means one silver bullet — privatisation. From the commentariat to the mass media, the cause of outrage is simple. PSBs are a den of inefficiency and corruption, require taxpayer-funded bailouts periodically, and consequently reduce economic vitality. The solution, therefore, is simple: privatise the banks, save fiscal resources and let a dynamic private sector engender a cleaner, more ficient banking system to better support the economy. 

There is a way bad ideas tend to seep into consciousness, just like bad cholesterol into the body. Privatisation as a solution, even panacea, for India’s banking problem is one such spectacularly bad idea. Why? Let us look at some basic facts. 

Banking losses are a social obligation – Always 
The global financial crisis (GFC) in 2008 showed up in stark systemic measure what has been true for many decades – losses arising out of banking failures are “social” obligations, to be underwritten by taxpayers, irrespective of the ownership structure of banks. 
 

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