RBI Bulletin: Big bang Approach To PSB Privatisation May Do More Harm Than Good

The RBI’s paper showed some of the major reasons that PSBs can serve the country better than private banks include better financial inclusion, better credit system, and better efficiency of the PSBs

A big bang approach to privatisation of state-run banks may do more harm than good, according to the latest Reserve Bank of India (RBI) bulletin released on Thursday. The bulletin analysed various pros and cons of privatisation and identifies how an emerging economy like India may face more challenges because of the privatisation of banks.

The RBI’s paper showed some of the major reasons that public sector banks (PSBs) can serve the country better than private banks include better financial inclusion, better credit system, and better efficiency of the PSBs.

It also highlighted that the private banks have failed to cater to the customers of the rural and semi-urban areas to date and customers from such locations are relying heavily on PSBs for banking.

Moreover, due to countercyclical monetary policy actions to gain traction, PSBs are able to do policy transmission faster and better, suggests the study. “During the last easing cycle, for example, their reduction in lending rates was substantially higher than that of private banks,” added the study.

As pointed out in the RBI Bulletin, PSBs help the countercyclical monetary policy to gain traction, private ownership alone does not automatically generate economic gains in developing economies, rather a more cautious and nuanced evaluation of privatisation is required.

The paper also suggested that market confidence tends to be in favour of PSBs in terms of crisis. At the onset of the global financial crisis, deposits flew out of private banks to PSBs. The outflows happened despite these banks offering relatively higher interest rates than others.

Meanwhile, the bulletin revealed that India’s inflation may still require a monetary policy response going forward as it remains above the target range even though it has eased in recent months.

"In India, supply conditions are improving, with the recent monsoon pick-up, strong momentum in manufacturing and a rebound in services," the central bank said in an article on the state of the economy.

"Inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward," the RBI added.