In the latest article of Reserve Bank of India’s (RBI) monthly officials have analyzed the privatization of Public Sector Banks(PSB). The paper published suggests privatization of PSBs in a gradual manner instead of a big bang approach. It also highlighted the role of PSBs in providing a better credit system and financial inclusion  in an emerging economy like India.

The privatization of public sector banks (PSB) should be made in a gradual manner since they are fulfilling important social objectives, said senior officials of the Reserve Bank of India (RBI). Large scale privatisation of PSBs or the big bang approach will do more harm than good, said Snehal S. Herwadkar, Sonali Goel and Rishuka Bansal of the Banking Research Division, Department of Economic and Policy Research, in an article published in the RBI’s monthly bulletin.

The paper further explains that the government is ready to privatize two banks, such gradual approach would ensure the fulfillment of important social objectives of financial inclusion and monetary transmission which is an important aspect of PSBs and often ignored by researchers proposing privatization. The PSB’s share in ATMs in rural areas is more than twice that of private sector banks, said three RBI officials.

In the recent release of the monthly bulletin, officials have given thumbs up for the recent mega-mergers of PSBs. They said it has resulted in the consolidation of the sector, creating stronger and more robust, and competitive banks.

It further highlighted that establishment of National Asset Reconstruction Company Limited (NARCL) will help in cleaning up bad loans from their balance sheets and recently constituted National Bank for Financing Infrastructure and Development (NBFID) will provide an alternate channel of infrastructure funding, thus reducing the asset liability mismatch concerns of PSBs. Overall, these reforms are likely to help strengthen the PSBs, the three RBI officials said.

Post global financial crisis (GFC), there has been a renewed interest in the public ownership of banks as many high income and developing countries capitalized or nationalized stressed banks.

The study of three authors show that private banks target their priority sector through investing in priority sector lending certificates (PSLCs), especially in agriculture and small and marginal farmers categories instead of lending. They said PSBs are more efficient than private sectors when the objective is changed from profit maximization to financial inclusion.

The paper unveiled that PSBs are more effective in monetary policy transmission aiding the countercyclical monetary policy actions to gain traction. During the last easing cycle for example, their reduction in lending rates was substantially higher than that of private banks, the article states.

The authors highlighted the point that deposits typically flew in the stronger banks both in the public and private sector when there were concerns in the banking sector. They said investors and depositors value the health of banks much more as compared to implicit government guarantees, while placing their trust.

It can also be argued that during such stress periods, if stronger PSBs had not existed, the destabilizing impact on the banking sector and the economy would have been much greater.

Higher resources raised by PSBs as compared to private banks in the recent years also provides a testimony of growing market confidence in them, the RBI officials said.

(With input from IANS)