bank divestment: ‘Big-bang approach’ to privatise state-run banks will do more harm than good, RBI says

India’s state-run banks have gained greater market confidence in recent years and a big-bang approach to privatise these lenders may do more harm than good, the Reserve Bank of India said today.

The central bank also said that if the sole motive is not only profit maximisation, then state-run banks have scored over the private counterparts in promoting financial inclusion and they help the countercyclical monetary policy action to gain traction.

“Public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike PVBs (private banks),” the central bank wrote in its bulletin published today.

Despite the criticism of weak balance sheets, the state-run lenders have weathered the Covid-19 pandemic shock “remarkably well” and recent mergers of PSBs have resulted in consolidation of the sector, creating stronger and more robust and competitive banks, it added.

The RBI‘s so-called alternative views come amid strong beliefs that New Delhi will introduce a bill in the parliament that will facilitate privatisation of state-run banks. The finance ministry is also in discussions with the RBI, the banking sector regulator, on ownership and controlling stakes issues relating to privatisation. Promoters can currently hold a maximum 26% stake in private banks.

In the budget for FY22 presented on February 1, 2021,Finance Minister Nirmala Sitharaman had said the government will privatise two public sector banks, apart from

whose privatisation process is underway, and one general insurer.

In April 2021, the Niti Aayog had given its recommendations on the banks that should be privatised to the disinvestment department. Central

and have reportedly been shortlisted, but the names have not been made public. There hasn’t been much progress since then, according to people with knowledge of the matter.

“The government has already announced its intention to privatize two banks. Such a gradual approach would ensure that large scale privatization does not create a void in fulfilling important social objectives of fi nancial inclusion and monetary transmission,” RBI said today.

In 2017, five associate banks and Bhartiya Mahila Bank were merged with the country’s biggest lender

. In a mega consolidation in 2020, the government had merged 10 nationalised banks into four large lenders, thereby bringing down the number of PSBs to 12 from 27 in 2017.

Setting up of National Asset Reconstruction Company Limited (NARCL) will help in cleaning up the legacy burden of bad loans from their balance sheets and the the recently constituted National Bank for financing infrastructure and development (NABFiD) will provide an alternate channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs, it added.

“From the conventional perspective that privatization is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it,” the central bank said.