In the 21st century, almost every earning individual knows the concept of a bank – it is a financial institution wherein individuals put their surplus, earnings, savings etc. for safekeeping, wealth growth, and for several other reasons. Banks, in turn, work according to the structure of the economy and help in promoting such an economy.
They are mainly authorized to receive deposits from people, provide loans easily, offer various types of saving schemes, etc. In layman’s language, banks are the driving forces for the smooth and efficient running of the economy of a country.
In India, there are mainly two types of banks but both types are headed by the central banking institution, Reserve Bank of India (RBI); public sector and private sector banks.
Banks are a critical part of the economy of a country – and although public sector banks like the State Bank of India are the biggest, the country also understands the significance of a PSB (public sector bank) as these too are a critical juncture.
The privatization of banks is the process wherein the ownership of assets is transferred from the government’s hands to the private hands. As we know, India has 19 Nationalized Banks all of which fall under the jurisdiction of the RBI and the Indian Government, There are currently 22 private sector banks wherein control lies with the shareholders of such banks.
Where bank privatization is concerned, the government no longer owns the corporation or the business and this also has a positive effect on the efficacy and objectivity of running the corporation.
You see, the government has been making efforts to merge and acquire the weaker public sector banks for the past several years and collaborating with them with a stronger banking system for overall better functioning – such changes promote privatization.
In 2019, the government privatized IDBI bank by selling its shares to LIC – In light of this matter, while presenting the 2021-22 budget, Finance Minister Shri Nirmala Sitaraman announced the plan to privatize two public sector banks as part of the Divestment Program. Thus there has been a constant debate of privatization of banks since the 1991 economic reforms.
The impact of privatization of banks most certainly has some positive effects, with negative effects on the flipside as well – these implications indirectly affect the economy.
In terms of positive implications, privatization is helpful in offering and receiving seamless customer service. It also affects the economy and helps in progress; and it is said that by privatizing banks, the Government will remove irregularity and bring in punctuality, discipline, and accountability in service.
In terms of incentives, the privatization of banks offers a lot of saving schemes as well and this has a direct impact on the productivity of employees as it reduces turnover, absenteeism, low morale etc.
Where implications are concerned, the most adverse effect of privatization will be the widespread economic gap as such privatization supports the rich and upper-middle class of society better than the poor. This concept makes the poor, poorer, and the fact that private banks focus mostly on urban areas when they should also focus in the rural areas to serve the poorer working class.
According to the World Bank, the privatization of banks for 70 developed and developing countries showed that doing so has become rather frequent and has become the norm since the Global Financial Crisis in 2008, and more so in emerging markets like China and India.
The majority of privatizations occurred via public sales in the domestic capital markets. Global trends found that privatized banks turn towards traditional banking models and increase their credit giving with no real negative impacts.
It must be noted that privatized banks that have been recapitalized prior to such privatization perform better in comparison to those after. Banks that were chosen to be privatized were ones that had the tendency to underperform their peers and had weaker assets, NPAs, etc but this doesn’t mean that all is good. Evidence of a bank’s post-privatization performance has both positive and negative impacts, as mentioned above.
The Analysis does not reveal a significant difference in the profitability of banks both pre and post-privatization – but there are significant differences between the developed and developing countries.
With the privatization of banks on the rise, efficiency, and convenience of operations, wide access to customers near and far, urban and rural is much easier.
Public sector banks will always be the country’s banking backbone that the majority of the public will trust and have faith in, but with the privatization of banks, you get guaranteed better customer service overall. This of course does not mean that privatization is the only way to go – as there are several flaws of private sector banks that require assistance and overall, conquering.
