In recent times Indian PSU banks poses major problem for policy makers, for which privatization is a logical way forward.
But the idea of Privatization of banks has many practical difficulties for implementation.
What are the problems with PSU banks in India?
PSU banks faces a slow credit growth delaying the revival in private sector investment, which is crucial for the economy’s return to a higher growth trajectory.
There has been only little improvement in functioning of PSU banks despite the introduction of various mechanisms aimed at improving governance in these banks.
Many PSUs are underperforming even after measures which has taken to reduce their tendency towards poorly judged or outright fraudulent lending.
Banks Board Bureau which was created to oversee banks has been noticeably absent at this time of crisis, partly due to less emphasis of the government.
What are few issues with Privatization?
There are many barriers to a programme of privatisation the primer one is that political risks are considerable for any government.
In addition, the banks themselves will be unpalatable acquisition targets for any private sector entity as many of them have books burdened with bad loans.
The government will naturally not receive a good price for them, opening itself up to attacks from the political opposition in some cases, it could be fortunate if it received any price at all.
It is also worth noting that many of the banks are vastly over-staffed or staffed by employees with low productivity, this excess employment cannot be easily shed by any acquirer.
Any programme of wholesale privatisation will have to deal with an aggressive campaign of obstruction by bank employee unions with political influence.
How test case privatization can be used as a solution?
The government could select one of its weakest banks as a test case for privatisation.
This could be sold as a special case of privatising a public sector bank that has conspicuously failed to perform.
Since it will be a special case, political opposition to the move could be muted.
If this bank performs well, the positive example could open the door to further privatisation in future.
Demand for erstwhile public sector banks might build up among possible acquirers, leading to the discovery of more remunerative prices.
Each additional privatised bank will support the argument, reducing opposition and increasing demand further.
