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Privatise All PSBs Except SBI, Economists – Free PDF Download


What has happened?

  • The Centre should privatise all public sector banks (PSBs), except the State Bank of India (SBI). This is because private banks have emerged as a credible alternative to PSBs with substantial market share.
  • Also, government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector, according to a report by the National Council of Applied Economic Research (NCAER).
  • National Council of Applied Economic Research is India’s oldest and largest independent, non-profit, economic policy research think tank.
  • Established in New Delhi in 1956, it acquired considerable national and international standing within only a few decades of its founding.
  • It is one of a handful of think tanks globally that combine rigorous analysis and policy outreach with deep data collection capabilities, especially for household surveys.

Lagged behind private banks

  • Barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade.
  • They have seen soured loans and operational costs soar, the report authored by NCAER’s Poonam Gupta and economist Arvind Panagariya said.
  • These PSBs have also attained lower returns on assets and equity than their private sector counterparts.
  • PSBs have lost ground to private banks, both in terms of deposits and advances of loans.
  • Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI, it said.
  • “The under-performance of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance during this period.

What initiatives?

  • These initiatives are- Recapitalisation, constitution of the Bank Board Bureau to streamline and professionalise hiring and governance practices;
  • Prompt corrective action plans; and consolidation through mergers, which helped reduce their number from 27 in 2016-17 to 12 currently,” the report said.

Non-performing assets

  • The non-performing assets (NPA) of PSBs remain elevated as compared to private banks,
  • Even as the government infused $65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.

Market valuation

  • The market valuation of PSBs, excluding SBI, remains “hugely” below the funds infused in such banks as May 31, 2022.
  • “Meanwhile, private banks have sped ahead by miles in terms of market valuation.
  • The steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in the ability of PSBs to meaningfully improve their performance,” the report said.
  • The market cap of PSBs, except SBI, is about $30.78 billion as compared to the recapitalisation amount of $43.04 billion.
  • The market cap of PSBs, except SBI, is about $30.78 billion as compared to the recapitalisation amount of $43.04 billion.

Which banks to privatise first?

  • The report suggests that the first two banks chosen for privatisation should be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years.
  • It also said that the PSBs with lower government ownership would be easier to privatise.
  • This is because the first two banks chosen for privatisation should set an example for the success of future privatisations.
  • The markets must see value in the chosen banks to attract two or more buyers.
  • Even as NITI Aayog suggested privatisation of the Central Bank of India and Indian Overseas Bank,
  • The report recommends Indian Bank and Bank of Baroda as the two top choices for privatisation.
  • These two have been shortlisted based on the criteria of return on assets, return on equity, NPAs, government stake, and asset base.
  • Between these two, Bank of Baroda would be easier to privatise since the government will need to divest by only 15% points to lower its stake below 51%.

Sale strategy

  • Suggesting the sale strategy, the authors have stated that if the Centre chooses to keep its stake near the 50%, it can sell its shareholding in the open market on the 15th of each month to lower its stake to 50%.
  • “The commitment will have the immediate impact of raising the share price in the market, and as the government makes good on its commitment, the price will move towards its expected post-privatisation level.
  • The government will thus be able to reap much of the benefit of the higher post privatisation price on the shares it chooses to divest”.
  • The second would be selling to a large strategic buyer or a consortium of buyers.
  • However, this would lead to one constraint in seeking a single large buyer.
  • This is because the current regulations require the shareholding by a single entity to be brought own to 26% or less within 15 years of initial acquisition.

Q) Computer Emergency Response Team comes under which of the following ministry?

  1. Ministry of Communications and Information Technology
  2. Ministry of Commerce
  3. RBI
  4. Department of Information & Technology




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