Friday, 12 Sep, 2025
By: Anshul Vipat
The major issue associated with the privatization of PSBs and converting them into private sector banks (PVBs) is that the PVBs concentrate on the more affluent sections of the population and the metropolitan/urban areas
According to an essay in the most recent issue of the RBI Bulletin, the privatization of public sector banks needs to be done gradually. The essay also warns against rapid, wholesale privatization. The recommendation is supported by studies showing that public sector banks (PSBs) contribute more to financial inclusion and countercyclical lending, which results in more efficient transmission of monetary policy. The paper also mentions that depositors have more faith in public sector banks than private sector banks. The article also emphasized how the recent mega-merger of PSBs has led to a sector consolidation, generating banks that are stronger, more resilient, and more competitive.
By 2020, there were only 12 PSBs when the government combined 10 nationalized banks into four sizable institutions. With Punjab National Bank, United Bank of India and Oriental Bank of Commerce merged; Canara Bank and Syndicate Bank merged; Indian Bank and Allahabad Bank merged; and Andhra Bank and Corporation Bank merged with Union Bank of India. Dena Bank and Vijaya Bank combined with Bank of Baroda in 2019 as the first three-way merger. Prior to this, the government combined SBI and its five partner banks with Bhartiya Mahila Bank. Over the past 20 years, several governments have supported and opposed privatizing Public Sector Undertaking (PSU) banks. The government had proposed privatization in 2015, but the RBI Governor at the time was opposed to the concept. The present privatization stages and the establishment of an Asset Reconstruction Company (Bad Bank) with 100% bank ownership highlight a strategy for finding market-driven solutions to problems in the financial system.
One of the major reasons behind the government’s plan for privatizing the PSBs is years of capital injections and governance reforms have not been able to improve the financial position of public sector banks significantly. Also, most of the PSBs have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalization and dividend payment record. Though, the steps sounds a good one for the revival of PSBs and improve their functioning capacity, there are few issues associated with the privatization of the public sector banks.
The major issue associated with the privatization of PSBs and converting them into private sector banks (PVBs) is that the PVBs concentrate on the more affluent sections of the population and the metropolitan/urban areas, leading to financial exclusion of weaker sections of the society, particularly in the rural areas.
The chart given below compares the geographical distribution of branches of PSBs and PVBs.
It is clear from the above chart that the Public sector banks play a large role in the financial transaction and activities in rural areas as PSBs have more branches than the private banks in the rural areas. In terms of metropolitan areas, the PSBs have a less share of branches as compared to the PVBs. Nirmala Sitharaman, the Finance Minister of India, in her 2022 budget speech had announced the plan of privatization of two state owned banks. Though, the government is keen on privatizing the PSBs, it also needs to consider the large financial inclusion offered by the PSBs.
