The paper argued that while private sector lenders are more efficient at maximizing profits, public sector banks (PSBs) have fared better in promoting financial inclusion, providing agricultural credit and achieving monetary transmission, which the government And RBI both have major objectives. The government had announced plans for privatization of two state-owned banks in the budget of FY 2012.
The paper, authored by Snehal S Herwadkar, Sonali Goyal and Rishuka Bansal of the Banking Research Division of RBI, said, “Such a gradual approach will ensure that large-scale privatization meets the important social objectives of financial inclusion and monetary transmission.” does not create a void in doing.” ,
A recent policy paper by East Niti Aayog Vice President Arvind Panagariya and member of the Prime Minister’s Economic Advisory Council Poonam Gupta.
‘More well-being enhancer than private peers’
Gupta is also the Director General of the National Council of Applied Economic Research (NCAER), an economic policy research think tank.
“An important aspect that is often overlooked by researchers proposing privatization is the role played by public sector banks (public sector banks) in financial inclusion,” the RBI paper said. “An alternative perspective provides empirical evidence of how PSBs have been more welfare than their private sector counterparts in India.”
Public sector banks prove to be more efficient when the objective function is changed to include financial inclusion (total branches, agricultural credit, priority sector advances).
The views expressed in the paper are those of the authors and do not represent the views of RBI.
Providing empirical evidence, the paper noted that lending by government-owned lenders is more cyclical than private sector peers and thus helps countercyclical monetary policy to gain traction and contribute more to macroeconomic stability. .
The paper states that several recent research efforts show that private ownership alone does not generate economic benefits in developing economies. It has also been argued frequently by economists that state-owned banks contribute more to economic growth and improve general economic welfare.
The privatization of public sector banks has long been seen as a major area of ​​pending reforms in India. The paper, after examining the performance of PSBs empirically, found that the labor cost efficiency of PSBs is higher than that of private lenders. This implies that state-owned banks can afford lower labor costs and generate higher levels of output.
With the recent merger of public sector banks, along with efforts to clean the balance sheet and old bad loans, PSBs are now in a much stronger position and hence the government should not rush to privatize the bank.