State Backed Banks Privatisation – Why we dont need it

State Backed Banks Privatisation - Why we dont need it

The nearly $2 billion fraud at the Punjab National Bank (PNB) last month has renewed calls for privatisation of state-owned banks. The managerial argument for privatisation is that :-

  • There will be sensible decision making.
  • It will Increase accountability to shareholders.
  • It will Reduce complacency in management
  • It will improve profitability and end political influence in business decisions.

Let us examine the points which is presented by the advocates of Privatisation :-

  • Importance of operational controls under Privatisation.

Counter Statement :- But Privatisation without strengthening regulatory controls and improving governance, won’t prevent fraud, or curtail undue exposure to risk

  • It has been argued that state control encourages management complacency as managers are secure in the knowledge The Government will always come to the bank’s rescue if it is in trouble.

Counter Statement :- But Governments have in the past bailed out banks that were considered “too big to fail”, regardless of ownership, to prevent a systemic collapse. In fact privatisation in some instances led to privatising profits and socialising losses.

  • It has also been suggested that privatisation makes management more accountable to markets

Counter Statement :- But These State-Backed Banks, having been partially privatised following the 1992 banking sector reforms in India, are already subject to stock-market discipline—including corporate disclosures and regular audited financial reports.

  • It would foster increased competition, which would reduce the cost of financial intermediation and improve bank profitability.

Counter Statement :- But it is unclear how a change in ownership from government to private hands would increase competition. Instead bringing down State-backed banks number to 15 from 21 can provide more effective competition than a large number of weak banks. Fewer but Stronger banks.

  • State-backed banks are hobbled by bureaucratic restrictions and undue political interference, making the sector susceptible to elite capture. Therefore a need of Political Interference. 

Counter Statement :- But As the experience with Air India has shown, political meddling can seriously hamper performance at state-run companies & it has been said that political considerations may have forced the hand of bankers to extend credit to several powerful business houses who have since defaulted.

What needs to be done to improve State-Backed Banks instead of Privatising them ?

  • There is a need to increase autonomy for state-backed banks and strict regulatory oversight by the banking supervisor.
  • The boards of state-backed banks should be independent of political influence.
  • Managers should be held accountable for operational performance.
  • There should be constant monitoring of targets, risk assessment and credit controls.
  • The clean-up of bank balance sheets and the overhaul of India’s archaic insolvency law are steps in the right direction, but they will only bear fruit if accompanied by improved governance and regulation.

(Originally Written by Indrani Dattagupta is a financial journalist for LiveMint)

Importance :-

Mains Level :- As Privatisation of banks have become hot topic after the PNB Scam & in this topic, there are certain arguments which can help to put our opinion that why we don’t need privatisation of banks instead all we need is overhaul of current banking system.


We can use these arguments & points in Essay Writing if subject will come on Privatisation of Banks .

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