The government of India for decades has been pursuing the policy of disinvestment and was able to privatize many non-performing public sector undertakings (PSUs) since the implementation of liberalization, privatization and globalization (LPG). It has disinvested many non-performing firms from the manufacturing sector to services sector which are now healthy and growing. Such disinvestments have not only brought down the cost to the public exchequers but are contributing towards economic growth too. So as a whole disinvestment efforts should be termed successful. However, there had always been strong resistance to every single effort to privatize any PSU from the employees and political class citing many reasons.
Following the policy legacies regarding the disinvestment of previous governments since the implementation of LPG policy in India, the present day Modi Government has also been pursuing the same disinvestment policy and has successfully disinvested many firms like Hindustan Petroleum, Rural Electrification Corporation Limited and Air India etc. Continuing the process of disinvestment, the government wants to privatize public sector banks (PSBs) too. For this purpose, it has finalized the list of banks to be disinvested in the coming days. However, it must be understood that legacies are good things to have but those cannot be followed all the time and circumstances. Unlike the privatization of many central public sector enterprises (CPSEs), there is very intense resistance to the disinvestment of PSBs from the workers, political class as well as public too. The opposition to the disinvestment process of PSBs do have some merit which cannot be ignored at all. This situation poses an important question whether the government should proceed with privatization of PSBs or not?
There is no doubt that the government has no business to be in business. So the government should try to cut down its involvement in any business enterprises. It should rather focus on development of industries through regulation and policy anchoring. But in India, the banking and financial sector is not just a simple business. Keeping the level of financial inclusion and unbanked population in India in mind, it is evident that the banking and financial sector is an effective tool as well as a dynamo for promoting economic activities in unbanked areas.
There are many who argue that the government is forced to recapitalize the PSBs almost every year due to capital erosion caused by NPA write-offs and this cannot continue forever and must stop. This argument at face value seems to have huge value but a deeper look into the operations of PSBs, it becomes very clear that these PSBs are one of the most effective tools for the implementation of government’s social security and financial inclusion schemes and a major portion of NPAs is due to implementation of the government schemes and undue interference in the operations. So, NPAs are not very unnatural for PSBs. However, it is important to know the fact that the private sector banks are not free from the malaise of NPAs. They are also having huge NPAs and the government and RBI have been rescuing private banks for a long time.
It must be understood that NPA in the banking system altogether, whether PSBs or private sector banks, increase the economic risks causing financial instability. Such a situation is counter-productive and the government and RBI in anyways cannot afford to keep their eyes shut irrespective of ownership of the bank and whenever there would be a need, the government and RBI have to intervene. So the government needs to change its focus and instead of just banking on disinvestment, the government should focus on keeping NPAs low without negatively impacting credit by introducing better corporate governance and lending practices into the banking system. Apart from this, the government must understand that the proposed bad banks can help in cleaning the balance sheets of banks increasing their lending capabilities but are not a panacea to the problems of NPAs.
There is no doubt that the government has no business to be in business. So the government should try to cut down its involvement in any business enterprises. It should rather focus on development of industries through regulation and policy anchoring. But in India, the banking and financial sector is not just a simple business. Keeping the level of financial inclusion and unbanked population in India in mind, it is evident that the banking and financial sector is an effective tool as well as a dynamo for promoting economic activities in unbanked areas.
There are many who argue that the government is forced to recapitalize the PSBs almost every year due to capital erosion caused by NPA write-offs and this cannot continue forever and must stop. This argument at face value seems to have huge value but a deeper look into the operations of PSBs, it becomes very clear that these PSBs are one of the most effective tools for the implementation of government’s social security and financial inclusion schemes and a major portion of NPAs is due to implementation of the government schemes and undue interference in the operations. So, NPAs are not very unnatural for PSBs. However, it is important to know the fact that the private sector banks are not free from the malaise of NPAs. They are also having huge NPAs and the government and RBI have been rescuing private banks for a long time.
It must be understood that NPA in the banking system altogether, whether PSBs or private sector banks, increase the economic risks causing financial instability. Such a situation is counter-productive and the government and RBI in anyways cannot afford to keep their eyes shut irrespective of ownership of the bank and whenever there would be a need, the government and RBI have to intervene. So the government needs to change its focus and instead of just banking on disinvestment, the government should focus on keeping NPAs low without negatively impacting credit by introducing better corporate governance and lending practices into the banking system. Apart from this, the government must understand that the proposed bad banks can help in cleaning the balance sheets of banks increasing their lending capabilities but are not a panacea to the problems of NPAs.
Rajeev K. Upadhyay
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