No economic reason to privatise banks

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 No economic reason to privatise banks

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• Fresh push to sell: The Finance Minister hinted that govt. is keen on retaining one company in each strategic sector, and selling off all else. So most of the public sector banks may get sold. The NITI Aayog too is pushing for it, as is ex-RBI D.G. Viral Acharya.
• Three arguments for privatisation: These are -

1. Private sector is more efficient, will cut flab in PSBs, and be more profitable. 
2. The govt. needs money and PSB sale will raise funds.
3. Due to NPAs, govt. will need to recapitalise PSBs, which is taxpayer money down the drain. Better to sell them off (privatise).

• What about Private Sector mismanagement: If anyone thought that private sector is a paragon of virtue, then 3 of the top private banks will prove him wrong.

1. ICICI Bank sacked Chanda Kochhar due to nepotism and corruption
2. Yes Bank almost collapsed when SBI was asked to save it!
3. The HDFC Bank is facing conflict of interest allegations in auto loans division. A large credit bureau - Experian Plc. - informed RBI that HDFC didn't give retail loan portfolio information in time.

• Who is responsible: The simple question is who brought the PSBs to this situation today. And the answer is - the govt. itself. It was not due to welfare spending (the main reason for nationalisation in 1969). It was due to heavy lending to private sector from 2004 to 2008, to build infrastructure projects. That included steel, mining, power, telecom, textiles and aviation.
• Private corruption: It is common knowledge that private firms used political connections to get huge loans, many of which turned bad, and today the PSBs and govt. ownership are being blamed for it. So the right thing to do is to end political interference. But what's being done is to hand over these banks to the very corporates who misused their facilities.
• What are banks: These are firms through which capital flows through the economy. They take public savings and use that as a notional base to create money, and then lend it for consumption and investment. The borrowers get India's savings and capital. Argument given is that markets are the best allocators of capital, but real world experience is different.
• Social issues: Before 1969, just a few rich folks (including ex-princes) controlled all funds, and formal credit never flowed into agriculture at all. Nationalisation changed all that, and farmers started getting formal credit. A priority sector was created. The PSBs played the key role in all this, way beyond their quarterly P&L statements. So sell them, and you end this social role substantially.
• Why money is needed: The real pressure is due to BASEL III norms, that require far higher capital for banks, which the govt. is struggling to get. So why don't we simply say no, for the time being, and save our banks from getting sold out?
• The last resort: Even if you really have to capitalise the banks, then all the govt. may do is a "paper" borrowing from the RBI, and banks may not have to dip into their capital reserves later at all. The govt. borrowing will remain with the RBI only. The fiscal deficit will rise, but in real terms it makes no difference to anyone. 
• Do not privatise: By privatising the Indian banks, we will hand them over to the richest Indians, who will then control all capital flows. A bad idea.

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