Within 25 years of the first nationalisation of banks in 1969, the government started reversing this policy. Thus, in less than three decades, the banking scenario has transformed

Indira Gandhi nationalised 20 private sector banks between 1969 and 1980, at that time representing over 90 percent of the deposits and loans in the banking system. This was done for purely political gains. The idea was to control nationalised banks to do politico-social banking — provide cheap loans to farmers, the poor and small businesses, to turn them into vote-banks.

Except some gains in spreading banking to rural areas, and channelising of government benefits to beneficiaries, the nationalisation of banks failed spectacularly. The poor ended up providing cheap CASA deposit to banks. The PSBs also splurged in lending non-performing loans to industrial cronies.

Within 25 years of the first nationalisation in 1969, the government started reversing the policy. New banking licenses were provided by the PV Narsimha-Manmohan Singh government in the early 1990s for ushering in the new-age private sector banking. That policy has worked.

In less than three decades, the banking scenario has transformed. The share of private banks (PVBs) in growth of deposits and credit has consistently been higher than nationalised banks by a wide margin for many years now. The PVBs have generated more profits, less non-performing loans, and lesser frauds than the PSBs.

Thus, the RBI research paper offers a very weak case for not privatising the PSBs.

NDA-II Consolidates, Does Not Privatise PSBs

The current government adopted the policy of consolidating the PSBs. The SBI’s subsidiaries were merged into the SBI. Eight PSBs were merged into five larger PSBs — the Bank of Baroda, the Punjab National Bank, the Indian Bank, the Canara Bank, and the Union Bank. Now there are 12 PSBs, including the behemoth SBI — six large and six small.

Consolidation changed very little. Some branches were rationalised, and common IT systems adopted. The risk assessment, banking culture, and technically outdated staff continue.

The Finance Minister’s Budget Speech 2021 also laid down the government’s wider CPSE policy. It could retain up to 4 PSEs in strategic sectors. Banks were included in strategic sectors. The policy implied that eight PSBs would be privatised over time. The government made the opening gambit proposing to privatise two.

These two PSBs were expected to be named soon. A NITI Aayog committee reportedly recommended two PSBs — the Central Bank of India, and the Indian Overseas Bank — though not still officially named.

Despite a categorical announcement, the Bill to amend the bank nationalisation laws was not introduced in the Budget Session. Four Parliament sessions, including the Budget 2022-23, have gone since, and there is no sign of the amendment Bill.

Will It Move?

All indicators suggest that the PSBs (excluding the SBI) are losing their deposits and assets very fast. The PSBs have the largest part of non-performing assets (NPAs), and bank frauds. The PSBs were the most reckless lenders in the 2005-2010 credit boom, which led to the RBI later imposing severe restrictions on their lending under the PCA. The government had to infuse more than Rs 3 lakh-crore of equity capital into the PSBs.

The PSBs have gradually reduced lending to businesses and industries. They don’t touch new-age digital businesses like startups. They only enthusiastically co-lend along government welfare benefits, which runs the risk of turning their loans into freebies.

It is undoubtedly in India’s best interest to privatise the PSBs, other than the SBI. The privatisation roadmap can be phased by first privatising the two PSBs, as already announced, and take up six more PSBs thereafter, in line with the CPSE policy. After completing this job, the remaining three could be taken up.

This, however, appears mere wishful thinking. The way the government has acted so far, there is no likelihood of the two PSBs being privatised during the remaining term of this government. The roadmap is unlikely to see any action.

The RBI staff can be rest assured. Forget big bang; there is unlikely to be even a whimper.
SUBHASH CHANDRA GARG , currently Chief Policy Adviser, Subhanjali, is former Union Finance Secretary, and author of The $10 Trillion Dream.