Various modes of disinvestments followed by the Government
1. Improved efficiency:
2. Lack of political interference:
3. Short term view:
5. Increased competition:
Privatization of Public Sector Banks (PSBs)
The Union Budget 2021-22 has announced the privatization of two public sector banks (in addition to IDBI Bank) and one general insurance company in the upcoming fiscal.
Need for Privatization in Banks
? Compared with private banks, PSBs continue to have high non-performing assets (NPAs) and stressed assets although this has started declining.
? After the Covid-related regulatory relaxations are lifted, banks are expected to report higher NPAs and loan losses. This would mean the government would again need to inject equity into weak public sector banks.
? The government is trying to strengthen the strong banks and also minimize their numbers through privatization to reduce its burden of support.
? After 1990, when RBI allowed more Private Sector Banks, competition increased. Today, Private banks’ market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%.
Recommendations of Different Committees:
Many committees had proposed bringing down the government stake in public banks below 51%:
Performance of Private Sector Banks
? Rising Market Share: Private banks’ market share in loans has risen to 36% in 2020 from 21.26% in 2015, while public sector banks’ share has fallen to 59.8% from 74.28%.
? Competition leading to better Products and Services:
After 1990, RBI allowed more private banks, which provided necessary competition to banks. They have today expanded their market share through new products, technology, and better services, and also attracted better valuations in stock markets.
Issues with Private Sector Banks
? Governance Issues:
? Under-reported NPAs:
When the RBI ordered an asset quality review of banks in 2015, many private sector banks, including Yes Bank, were found under-reporting NPAs.
Central PSEs were initially created to fill gaps in the economy where the private sector was not willing to invest. Given that the prevailing business environment in India is largely characterized by a dynamic market economy and vibrant private sector, this approach may no longer be required. Thus, the lead taken by the Centre to implement its agenda of privatization or disinvestment at this juncture is both appropriate and welcome. However, the government must ensure that it can insulate the poor and vulnerable from the downsides of reduced welfare and unemployment that can be a short-term drawback of privatization.