Should all nationalized banks be privatised?
Issues related to consolidating the Indian banking sector have been discussed 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.
Public sector banks have always been used by successive governments to implement schemes for which there is insufficient money in the budget. We are now in an era of fiscal stringency, with the Fiscal Responsibility and Budget Management Act obliging the government to keep cutting its fiscal deficit. In these circumstances, there is less fiscal space than ever for launching new government schemes. So, these banks provide an especially important means for the finance minister to finance schemes that can fetch votes and possibly improve economic outcomes. This is equally true of public sector insurance companies, and oil companies (which for years subsidised diesel and petrol). These will, therefore, not be privatised.
For example, in recent times, Infrastructure was the top priority, however private banks were not extremely enthused about loaning to that area, thus PSBs had demonstrated priceless in providing finance for the infrastructure. It was noticed that private banks had demonstrated extremely reasonable in avoiding infrastructure projects of questionable feasibility that conveyed many risks. At the point when many infrastructure ventures sank, for an assortment of reasons, the PSBs were left with bad debts totalling lakhs of crores.
Critics might say that this is precisely why the banks should be privatised — they will show greater diligence before approving projects with unclear financial profiles. But from the politician’s viewpoint, forcing PSBs to lend for infrastructure was an essential way of achieving targets without breaking budgetary limits set by law.
Education loans provide another example. The government is keen on expanding such loans to students, who are increasingly entering high-cost private colleges. So, public sector banks have been instructed to step up education loans.Private sector banks are aware of the high risks in such loans and have mostly steered clear of them. No less than 90% of all educational loans have been given by public sector banks. In some countries, the risk is transferred to the government. In India, PSBs have been loaded with the risk.
A similar tale comes from public sector insurance companies, which have been obliged to launch schemes at unviable low premiums. The government has created a Pradhan Mantri Jeevan Jyoti Bima Yojana — a term life insurance policy.
In 2016-17, the second year of its operation, claims under this scheme exceeded premiums by 21%, making it unsustainable. An even worse outcome afflicted the Pradhan Mantri Suraksha Bima Yojana, which provides payment of Rs 2 lakh for accidental deaths or grievous injuries. In this case, claims were a whopping 70% higher than premiums. By contrast, private insurance companies with similar insurance policies have a claims rate less than half the premiums.
Politicians are reluctant to raise the ultra-low premiums for flagship schemes aimed at capturing votes. No such instructions on premiums can be given to private insurance companies. That’s a key reason why the government insurance companies, like government banks, will not be privatised. They are too politically valuable for governments seeking to distribute freebies and subsidies.
Are nationalized banks fulfilling their objective of financial inclusion?
The Government of India and the Reserve Bank of India have been making concerted efforts to promote financial inclusion as one of the important national objectives of the country. Some of the major efforts made in the last five decades including – nationalization of banks, building up of robust branch network of scheduled commercial banks, co-operatives and regional rural banks, formation of self-help groups etc. The fundamental objective of all these initiatives is to provide the financial services to the large section of the hitherto financially excluded Indian population. They have taken various steps to include vast segment of unbanked people in to mainstream banking such as Micro Finance- Self Help Group Model (1992), Kisan Credit Card (1998), No Frill Accounts (2004), Business Correspondents and Business Facilitators (2006, 2009) Swabhimaan (2011) financial inclusion model but the path of financial inclusion is continuous to be challenging.
Various financial experts argue that bank account is the most basic step of bringing such people under financial mainstream. So the primary objective of financial inclusion should be to open bank accounts of unbanked people. financial inclusion basically stands for including the people lying on the lowest strata of our social pyramid into the financial mainstream.
The Reserve Bank has taken various steps to intensify the credit delivery mechanism and financial inclusion by changing the guidelines for priority sector lending and trying to bring excluded people from both rural and urban areas under the coverage of institutional finance.
RBI Strategies for Financial Inclusion
The strategies that need to be adopted for financial inclusion are as follows:
· Policy measures
· Making financial services simple, hassle-free and affordable
· Creating a conducive climate for lending
· Use of innovative products
This has a positive impact on the process of inclusive growth. Financial inclusion is a necessary condition for inclusive growth and in order to achieve it, we should remove or reduce all regional imbalance of financial infrastructure. Financial inclusion should be used as a tool for inclusive growth and Banks, and Micro Finance Institutions, and Non Government Organisations can play a simultaneous major role to achieve it. Therefore nationalized banks are do making efforts to fulfil the objectives of financial inclusion.
To conclude, banking plays an important role in economic growth and development. In India, PSBs have been in the forefront of mobilizing resources from far flung rural areas as well as extending banking services in the remotest parts of the country. The burden of social agenda has largely been shouldered by PSBs without any compensation. Therefore, in the interest of maintaining credibility of PSBs which account for nearly 70 percent of banking activity in the country, the government is justified in recapitalizing the PSBs regularly. However, there is need to undertake research on evolving appropriate norms, granular, for evaluating performance of different banks operating in India without stifling flow of credit to productive sectors. In final analysis, the economy may be best served by creating fewer, larger, and stronger public sector banks