Privatisation: Banking

Around a month back, over 500 bank employees under the banner of United Forum of Bank Unions (UFBU) protested outside the Reserve Bank of India, Mumbai. The union was against the government's plans to privatise Public Sector Banks (PSUs) and amend banking laws. They have further declared to organise a nationwide strike on August 5, 2011. The government in the coming monsoon session (which is slated in August) is planning to amend the Banking Regulation Act and remove the existing ceiling of 10 per cent on voting rights of investors in private banks as well as increase the ceiling on voting rights of shareholders in public sector banks to 10 per cent. It is further planning to consolidate five State Bank subsidiaries (from State Bank group) under the State Bank of India.

Post financial crisis in 2008, we have seen massive exodus of savings from private sector to public sector banks. So, the odds are pretty much stacked up against the private sector. But, at a time when around 20-25 per cent (as per RBI) of the banks are private with so many world class companies operating within the economy, not allowing the banks to operate in full capacity just does not make sense in economic terms. So, this actually might be a good time to privatise the sector as done by many other countries like Brazil. 

Privatisation would encourage competition. Not only the number of branches would see a huge surge but also consumers would get more choices – especially people in rural India. The rural customers who are currently relying on small bank branches with limited offerings would be exposed to modern banks that could offer them with an array of services. Financial inclusion in true sense can be achieved this way. Moreover, expansion in the sector would create job opportunity and even current bank employees may see a headhunting spree.

However the apprehension of UFBU is not outrightly wrong. The increased ceiling (from 1 per cent at present to 10 per cent) on voting rights would allow private players to form a syndicate, by clubbing five players and gain a 50 per cent voting rights and control PSUs in spite of it being called ‘Government of India Undertaking.’ The mergers of banks would give a freeway to NBFCs to swindle public money – as they did in Bihar in 2007 when NBFCs were accused of swindling a sum of Rs.12,000 crore of small investors. Moreover, failures of financial firms can have amplifier effects on the economy. Moreover, banking facilities would remain unaffordable for many as PSUs offer zero (or Rs.1000) balance saving accounts while the private banks offer accounts with minimum balance of Rs 5,000.

In countries like ours where bank reaches only a fraction of population, privatisation can give impetus to organise the financial sector. The relevance of regulation and regulators is imperative but that should not restrict more players to come. There should be clauses that would prohibit banks a complete autonomy.