Soaring profits are no reason to go slow on banking reform

The sense that bank privatization may have stalled stems from the government’s failure last year to privatize IDBI Bank as planned.
The sense that bank privatization may have stalled stems from the government’s failure last year to privatize IDBI Bank as planned.

Summary

  • India’s privatization of public sector banks has a long way to go. With IDBI Bank’s sell-off languishing, this policy needs a push. Regardless of profits, PSBs would serve the economy better under wide private ownership than under the government.

Banks in India reported record profits last fiscal year, public sector banks (PSBs) included, but a stellar bank performance is no reason to abandon reforms in this sector. Bank privatization, for instance, has evidently taken a back seat, with no major moves seen lately by way of the government diluting its ownership. 

Perhaps the big mergers executed a few years ago that brought down the count of PSBs in India to 12 from 27 got policymakers to step off the pedal. Now with swelling profits stuffing public coffers, off-loading banks may slide further down the priority order. But banking remains much too public-sector dominated. 

Also read: Roadmap for financial sector reforms to be unveiled post polls

Government equity control must come down, so that these banks are subject to market discipline, with private owners keeping watch. As a business of judging risk and pricing credit, banking tends to perform best over time when bank managers are held to account by a crowd of owners united only by profit as a common interest. Which is why this upswell should be taken as an opportunity to privatize PSBs.

The finances of PSBs have never looked so robust. Their net profits hit 1.4 trillion in 2023-24, up 34% from 2022-23, while bad loans as a proportion of their total advances are at a decadal low of under 4%. These bright numbers are reflected in the stock-market strength of listed lenders. It is no surprise that private banks have performed even better. 

Ever since being allowed in, they have been taking business away from PSBs. Their net profits grew a stronger 42% to 1.7 trillion in 2023-24. The loan books of private banks also look cleaner, overall. With credit growth in good shape across the sector, most banks look reasonably well placed right now, even if their tilt towards retail lending over corporate loans isn’t ideal. 

The big policy question is whether and when further chunks of PSB equity will go private. The sense that this process may have stalled stems from the government’s failure last year to privatize IDBI Bank as planned. In the context of this miss, reports had emerged that PSB privatization would be put through a rethink. The idea has always faced resistance. 

Also read: No merger but PSB privatization still on cards

If PSBs can be profitably run and also serve as instruments of state policy, some critics ask, why privatize them? As with the central bank’s surplus, the Centre may also be tempted to rely on profitable PSBs for revenues. These arguments do not take the larger picture into account. 

As capital plays an ever larger role as the economy’s mover and shaker, we need a credit market that’s as efficient as it can get. This requires lenders to achieve corporate governance and operational efficiency levels that are globally competitive. Widely held bank shares would promote both and result in better allocation of financial resources.

A profit bonanza should not get in the way of bank privatization, an agenda that has its own merits. It’s true that the Centre often depends on its network of PSBs to meet welfare objectives like financial inclusion; indeed, this is why banks were nationalized back in 1969. 

However, retaining the State Bank of India is all the government needs for that purpose; this PSB’s vast reach across India should suffice. We should aim to privatize the rest as we go along. For the market discipline of private ownership to take full effect, shareholder dispersal is key. Instead of strategic stake sales, let’s make public offerings of equity. Or perhaps award PSB shares to citizens at large via direct transfers. The status quo is sub-optimal.

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