Privatization of PSU Banks

Privatization of PSU Banks

This has become a talking point across various forums and media events. In the banking world, it is one of the most debated GD topics among recruiters. The topic spawns divergent views with rationale, data, statistics and graphs thrown in to make a case. In a recent discussion that I happened to witness, an overwhelming majority pointed out to the large NPA numbers and declining profitability at PSU banks as primary reasons for its privatization.

So, should they go in for privatization?

Before we do that, let’s analyze some important points:


A pertinent question that needs to be answered – If PSU banks get privatized, who will take care of social banking and banking for the masses? Currently, such obligations are largely met by the PSU banks. Although many private sector banks also take up such causes as part of their CSR initiatives, they just don’t scale up to PSU banks level.

Before we think of privatization, consider this: Imagine that all government hospitals in our country are privatized just so that they can offer better medical services to patients and be profitable. Now in the absence of government hospitals, can the poor go to these fancied private hospitals and seek out the best medical treatments for themselves? It is amply evident that such hospitals are beyond their means. Drawing a parallel to banking, private banks cater to a different set of clienteles. The poor certainly can’t afford them because of their high minimum balance requirements and transaction costs, greater sophistication, complex technologies etc. We are trying very hard to get our socially deprived people and rural families from the country’s hinterland into mainstream banking. Such financial inclusion efforts need banks who can support the cause in the best possible way and for that, PSU banks are the only way to go.


Public and private sector banks have different work cultures and most PSU bank employees are totally against privatization. It will be extremely difficult to change the employee mindset and force-fit to a new culture. Easier said than done! Also, once in the private sector, job security will be a thing of the past. That can deeply affect employee morale as they are so used to working in a job-secure environment. Five decades of bank nationalization have got deeply embedded in its DNA and employee psyche. These cannot be course-corrected and dispensed with overnight. The employees, aided by their staff unions, may revolt leading to strikes and disruptions. No ruling dispensation would want to take the bull by the horn even if it is a pragmatic step forward, lest they lose their popularity. A lot of thought and back-up plans need to be put in place before we embark on the privatization journey.


The current NPA problems leads to provisioning and declining profits which in turn leads to deterioration in share value which then affects the Tier 1 capital of the banks which further affects the bank’s ability to lend since they can’t meet the minimum capital adequacy standards as per Basel norms and RBI’s internal benchmarks. This is a vicious cycle that must be broken before any kind of privatization can be considered.


Privatization involves government divesting its stake in PSU banks and issuing shares to the public. Are the markets inclined to buy the shares given the current NPA and Capital Adequacy woes? Investors would, most probably, ask the banks to first address these issues and put their house in order and show a viable roadmap before investing. Moreover, given the stress in the sector, the share sale will not fetch a good price for the government in current market conditions. So, disinvestment is not even on the table.


If one considers the intent and strategy of the Government of India, it has been to merge two to three banks into one. Not privatize. The recent Bank of Baroda-Vijaya Bank-Dena bank merger is an example of that. The Government is also in favour of recapitalization of PSU banks. In the first three quarters of this fiscal, the government has infused ₹51,533 crore in these banks. These are clear signs that privatization is not a favoured option among the echelons of power.


As one can see, privatization is clearly not a way to go. PSU banks are here to stay to carry out the country’s social and commercial banking objectives. We need to address their issues and strengthen them. What is required is fully functional autonomy, professional management, responsible finance and corporate governance, state-of-the-art technologies and adoption of ‘Customer First’ policy in its DNA and work ethics. If they take care of these elements, they can be better than the best.


Prof. Sundar G
Faculty for BFSI – BANKEDGE

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