Privatisation of Banks: Is It The Right Path?

The Union Budget 2021 has announced the privatisation of two public sector banks and one general insurance company in the upcoming fiscal 2021-22.

Privatisation of the government banks means that the ownership of the banks will no longer rest with the government that is government can't be holding more than 50% stake in the bank. The move, coming after 51 years of nationalisation of government-owned banks, will give the private sector a vital role in the banking sector.

Following an idea to align the banking sector with the socialistic approach of the then government, nationalised fourteen banks in the private sector, in 1969. Again, in 1980, nationalised six more private banks. These nationalised banks are the majority of lenders in the Indian economy. 

Public Sector and Private Sector Banks:

A public sector bank is a bank in which the Government holds the majority of its stake. The Public Sector Banks are classified into two groups:

  • Nationalized Banks 
  • State Bank and Associates

A private sector bank is a bank in which most of the bank's shares are under the control of its shareholders. There are currently 22 Private Sector Banks working in India.

Hot debates are on regarding the advantages and disadvantages of privatisation of banks. A few of them are:

Benefits of Privatization of Banks

Private sector banks are more advanced, competitive, and efficient; provide better customer service; more serious towards their work and responsibility. They follow the concept of lowest risk and are much strict against loans and frauds than Public sector Banks.

  • Foreign investors prefer to invest in private sector banks rather than public sector banks.
  • Help to reduce the burden of the Government of India. 
  • Will increase the productivity of the employees by providing incentives to the employees according to their work. 

Disadvantages of Privatization of Banks 

The privatisation of two public sector banks will set the ball rolling for a long-term project that envisages only a handful of state-owned banks. The rest either consolidated with strong banks or privatised; this leads to several undesirable situations. Some of these are:

  • The privatized banks will maximise their profit, hurting the middle class and poor people of society.
  •  Private Banks are ruthless to the poor and support the rich people of the society. This concept will lead to the widespread economic gap, make the poor poorer.
  • Privatized banks will mainly focus on urban areas, and it will slowly diminish in rural areas of the nation.
  • Fragmentation of public infrastructure may lead to severe problems of job losses.
  • Government has to face difficulties in implementing social welfare schemes.

Reasons for Privatisation: 

 The government justifies its stand on the following grounds:

  • Years of capital injections and governance reforms have not significantly improved the financial position of public sector banks. 
  • Many of them have higher stress assets than private banks and lag the latter on profitability, market capitalization, and dividend payment records.
  • Many committees had proposed bringing down the government stake in public banks below 51%. 
  • RBI Working Group recently suggested the entry of business houses into the banking sector.

Reserve Bank of India foresees four categories of banks functioning in India in the coming days. A few large Indian banks will dominate the first set of banks with a domestic and international presence. Next, there will be several mid-sized banks with an economy-wide presence. The third set would encompass smaller private sector banks, small finance banks (SFBs), regional rural banks and cooperative banks, which may specifically cater to the credit requirements of small borrowers. The fourth segment would consist of digital players who may act as service providers directly to customers or banks as their agents or associates.


  • It is wrong to believe that private sector banks are a safe bet. Dubious lending, inefficiency, under-reporting of NPA etc., were noticed in private sector banks; the government intervened to rescue three such banks during 2020.
  • Though the gross bad loans of government banks are pretty high, it is the private sector that contributes 97 per cent of bad loans. Banks granted Most of these loans because of political interference.
  • The government is infusing crore of rupees in state-owned banks to cover up its irrational act of writing off loans of corporate houses.

Little opposition:

The proposal of the government to privatise the nationalised banks has not faced severe opposition from the public because they wrongly believe the myth propagated by capitalists that privatisation is the only solution for all economic ills. It is fuelled by the apathy of the government bank employees towards customers and the poor quality of service. The employees of the government banks have started agitation in the outdated mode of causing inconvenience to the public and troubling them, which gives the impression that these employees are concerned with the safety of their jobs only.

These employees could have demanded making PSBs into a corporation like Life Insurance Corporation (LIC) while maintaining government ownership, giving more autonomy to PSBs. Or, they could accept the challenge to run their respective banks as a cooperative by the employees themselves.


According to PROUT, the banking system is indispensable for promoting both collective welfare and the economic advancement of people, and its fundamental aim is to “Keep money rolling.” It is because the value of money increases with its mobility. That is, the more  that money changes hands, the greater its economic value. But, on the other hand, the more cash is kept immobile in a safe, the more it loses its utility, and thus its economic value decreases.

PROUT emphatically states that business people should not have the right to manage banks because experience has shown that dishonest business people have seldom protected the hard-earned savings of ordinary depositors. On the contrary, many have profited illegally or recklessly investing the bank’s money; their activities have also ruined many middle-class families.

The banking system will have to be managed by cooperatives. The immediate or local government will control the Central or federal bank.    

PROUT says the banking system must be vigilant about two important points. First, the intrinsic demonic greed of the banks must not be allowed to jeopardize the life of the common people. In the past, in most countries of the world, banks threatened the common people's lives. More or less, it still occurs today, not only in underdeveloped countries but also in developing and developed countries. Secondly, the banks must not allow unwise administrators or governments to print monetary notes indiscriminately without reserving the proportionate amount of bullion in their treasuries.

The first defect ruins not only low and middle-income groups but also impoverishes wealthy people. The second defect destroys the very life of society. It leads to widespread inflation, which jeopardizes internal trade and commerce and foreign trade and barter. Thus, even if there is abundant production in a country, the common people do not benefit. On the contrary, the rich become more prosperous and get more scope to continue their relentless exploitation.

PROUT opines that the banking system must continue; otherwise, it will hinder the mobility of money. If people oppose the banking system because selfish whims or any other sentiment guide them, their economy will remain in the dark ages.  They are bound to lose equipoise and equilibrium in the physical sphere, remain lopsided in the psychic and spiritual spheres.

Issue of controlling Business enterprises:

Some argue that the state should directly control all business enterprises to be free from exploitation. Others say that all businesses should be run by cooperatives so that people will be able to control their economic destiny. Still, others argue that enterprises should be in private hands and legislation should handle greedy exploitation, imposing high taxes etc. Capitalists want the shortcomings in society to remain so that they can continue to exploit the situation.

PROUT unambiguously solves this ticklish issue by proposing a three-tiered industrial structure, i.e., private, government and Cooperatives, as the most important economic sector. There will be no chances of overlapping economic activities. In the collective economic system of PROUT, the profit motive has no place – here, the production is for consumption. PROUT believes that there can be a harmonious adjustment between individual's Rights and Collective welfare when we follow the spirit of Sama-Samaja Tattva (Principle of Social Equality). The teachings of Neohumanism in our individual and collective life are based on the rationalistic approach, the principle of limited freedom in the physical world, as it is finite, and the policy of complete freedom in the spiritual and psychic worlds that are infinite in scope.

True, it is not the business of a government to indulge in business or trading. Still, the motivation and purpose behind PROUT’s political system are basically to administer so that economic institutions can materialize the principles and policies of a developed economy. Society progresses ahead with the sublime motto: for the good and happiness of all. Political institutions are not an end in themselves, but a means to achieve economic well-being and social progress. 

Banks are the backbone of the economy. The Indian Constitution says, “Every economic activity in the nation should be centred at the welfare of the people”; privatization will violate this concept because it is evident that Private Banks will aim to maximise their profit. In an irrational move of blindly privatizing economic activities, the Indian government is shirking its primary responsibility.   


5 April 2021

Ganesh Bhat
Ganesh Bhat Sirsi


Post a Comment