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RBI paper wants gradual privatisation of banks

Although private banks have been making some inroads in rural areas, their progress remains slow. For example, PSBs’ share in ATMs in rural areas is more than twice that of private banks.

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“Against the backdrop of these findings (on the role of PSBs), a big bang approach of privatisation of these banks may do more harm than good,” said the article by Snehal S Herwadkar, Sonali Goel and Rishuka Bansal. The government has already announced its intention to privatise two banks.

A “big bang” approach to privatisation of public sector banks (PSBs) may be counterproductive, given their important role in monetary policy transmission and financial inclusion, researchers at Reserve Bank of India’s (RBI’s) economic and policy research department said in an article.

“Against the backdrop of these findings (on the role of PSBs), a big bang approach of privatisation of these banks may do more harm than good,” said the article by Snehal S Herwadkar, Sonali Goel and Rishuka Bansal. The government has already announced its intention to privatise two banks.

“Such a gradual approach would ensure that large scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission,” the article, published as part of the central bank’s bulletin for August 2022, added.

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The lending patterns of PSBs is less pro-cyclical than those of private banks and thus PSBs help counter-cyclical monetary policy action to gain traction. PSBs also have a better record in the realm of financial inclusion than their private sector peers, even though the latter set has been more efficient at profit maximisation, the article said.

A disclaimer states that views expressed in the piece are those of the authors and do not represent that of the RBI.

The authors said that the article seeks to offer an alternate perspective on the issue of PSB privatisation “by taking inspiration from the strands of literature that justify the role of PSBs on several grounds”.

PSBs have been more effective in monetary policy transmission, the article said, aiding counter-cyclical monetary policy actions to gain traction. “During the last easing cycle, for example, their reduction in lending rates was substantially higher than that of PVBs. At the same time, their deposit rates were relatively stickier,” it added.

The resultant higher net interest margins (NIMs) of private banks is an indication of their profit maximisation objective, while PSBs have contributed to larger social goals by playing a crucial role in monetary transmission, the article observed.

PSBs have consistently allocated a larger proportion of their total credit to agriculture and industry than private banks, the article said. Over time, the share of co-operative banks and regional rural banks (RRBs) in agriculture lending has reduced, while that of PSBs has increased. PSBs have a lion’s share in infrastructure lending and their role has been especially crucial against the backdrop of withering away of erstwhile development financial institutions, the article said.

PSBs account for the highest share of bank branches in rural areas, followed by semi-urban areas, in adherence to their commitment to the financial inclusion objective, the article said. They also dominate in meeting the credit demand of rural areas.

Although private banks have been making some inroads in rural areas, their progress remains slow. For example, PSBs’ share in ATMs in rural areas is more than twice that of private banks.

The share of PSBs in business correspondent (BC) outlets in rural areas has remained consistently above 60% over the years, the highest among the bank groups, the article said. Private banks, on the other hand, have adopted the urban BC model.

The article cited analysis that showed PSBs’ labour cost efficiency to be higher than that of private banks for most years, except 2016. “This implies that incurring lower cost on labour, the PSBs can generate higher level of output,” the article said, attributing the higher cost efficiency of PSBs to an effective use of the banking BC model, coupled with the implementation of other cost-efficient techniques.

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First published on: 19-08-2022 at 06:10 IST
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