500 + Words Essay on Bank Privatization – Pros and Cons

Privatization is the process by which the government transfers ownership and control of economic units to the private sector. The primary tenet of privatisation is that the competitive environment and market system compel corporations and private entities to function more efficiently. Littlechild and Beesley (1989) believe that privatisation can improve economic performance by increasing market forces, provided that at least 50% of their shares are transferred to the private sector.

Privatization is a broad and diverse phrase that refers to the process by which the private sector assumes operational or financial control of public institutions. In other words, privatisation entails the abolition of all government controls and involvement in the establishment of supply and demand mechanisms.

Banks are significant because they play a critical role in the economy. According to Levine (1997), a critical variable in the process of financial development and economic growth is the ownership structure of banks and their fundamental role in the national economy. The banking sector’s primary objective is to move financial resources into more productive and efficient initiatives that will aid future growth. The government’s job in the financial system is to ensure that banks perform this critical function efficiently through their rules and regulations. As a result of this critical role, governments in developing nations frequently hold banks.


The profit incentive is said to motivate the private sector to manage a business more efficiently. However, private corporations can exploit their dominant strength while ignoring greater social costs, say opponents. The first and most essential cause for privatisation is the weakening economy. The ongoing pandemic has significantly harmed the Indian economy, prompting the government to take such drastic disinvestment measures. The growing NPA issue has further fueled the privatisation drive. Because of their welfare state programmes and loan forgiveness, PSBs contribute the most to NPA. The government wants to reduce the NPA problem and relieve the PSBs by privatising them.

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Dual control is also an issue, with the Ministry of Finance having dual jurisdiction over PSBs under the Banking Regulation Act, 1949, and the Reserve Bank Act, 1934. Instead of being autonomous like private banks, the RBI is constantly interfering with routine PSB operations. With an economic and political analysis of the decision, the privatisation of PSBs has sparked a large national debate.  Privatisation has both beneficial and negative effects on the Indian economy.

Disadvantages of Bank Privatization

Privatization plan/scheme excludes dual inspection by the Ministry of Finance and the RBI. That leaves private banks out of the purview of the Central Vigilance Commission and the Central Bureau of Investigation, which is bad for depositors.

Due to the PSBs dominance in rural areas, rural banking will be a key hurdle for privatisation. Unlike commercial banks, which have branches only in the country’s more developed or populous locations, the PSBs have branches in virtually every district. In comparison, private banks would be hard-pressed to match the PSBs’ dominance and reach across the country That said, even if private banks take over existing PSB branches in rural areas, building trust among the rural population will be tough.

Profitability is the primary concern of private sector banks. A recent example of this is YES Bank. The PSBs’ vision of a welfare state may suffer due to private banks’ profit-making objectives. The welfare state’s PSBs provide low-cost services, subsidised accounts, and other government-related initiatives. They often offer loan forgiveness and write-offs to the underprivileged populace at the behest of changing political landscapes.

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By charging high service fees on banking transactions to cover operational costs, private banks may generate a difference between the rich and the poor and higher interest rates on loans, resulting in unequal income distribution

It is important to note that PSBs are backed by the sovereign, as opposed to private banks. Because of the government’s assistance, they are unlikely to fail or go extinct. A failure of a private player leaves its clients without recourse.

Advantages of Bank Privatization

There is substantial evidence that state ownership is inherently inefficient in comparison to private ownership. Numerous political and economic factors contributing to government management inefficiencies include insufficient rewards and incentives for managers and supervisors, a lack of required commitments to improve performance, and non-economic goals. Privatization of banks is one of the most significant concerns confronting most governments worldwide. Governments continue to fight divesting themselves of banks and financial systems and reducing their intervention. On the other hand, the state banking system is perilous in virtually every country that has state-owned banks. However, if the government’s objective is to foster a more efficient and market-oriented economy, it is critical to mitigate the government’s influence on credit allocation decisions.

The ever-increasing and never-ending burden of the Non-Performing Asset (NPA) problem is the most contentious topic of privatisation and its impact on the economy. It is a crucial issue to be addressed for successful and rapid economic progress. The rise in non-performing assets (NPAs) has a negative impact on the economy, in the long run, privatising PSBs will help reduce NPAs.

Capitalizing PSBs with new equity will enable them to restart lending, enhance performance, and simultaneously privatise their ownership structure. Encouraging new stock and international investment could help the debt-ridden PSBs recover.

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During the epidemic, the privatisation drive will help stabilise the economy by reducing macroeconomic uncertainty. Due to market discipline, the privatisation of a few losing PSBs will force other PSBs to change their strategies. For this reason, it is more important than ever to resurrect the banking industry. This will assist the economy recover after the pandemic by allowing private investors, including foreigners, to invest in banks.

Administrative efficiency is important for a bank’s effective operation and governance. Private banks have superior administrative efficiency than PSBs. A private bank offers better overall customer service. So, privatising PSBs will improve customer service. Improving administrative efficiency and customer service will be aided by more technologically advanced items. In addition to expanding their reach in rural banking, these tech-driven offerings will help private banks provide quality service to their clients.

Privatisation also loves market competition. Less government intervention means more private-sector competition, which means higher performance and efficiency for private banks. Confronted with increased competition, private banks will develop new products that cater to specific consumer needs while minimising risks.

With better infrastructure and people, private banks will be able to achieve their target-oriented objectives.

Conclusion

With the sustained expansion, the Indian banking sector is one of the greatest contributors to the economy. However, the banking sector, particularly public sector banks, has been heavily impacted by the pandemic. Private players, increased capital inflows and foreign investment may help the banking sector emerge as a new age eventually leading to economic resilience. The government’s decision to privatise PSBs may help boost the economy and the sector’s growth. It will increase competition and help the debt-ridden PSBs grow.

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