Image source:

This article has been written by Shivank Datta, pursuing the Diploma in Business Laws for In-House Counsels from LawSikho.


The objective of a macroeconomic policy is to prioritize the steady growth of the economy. In order to facilitate the steady growth of the economy, the government introduces various mechanisms and plans with a focused approach towards improving fiscal policy. The banking sector in India plays a huge role in the development of the economy and the business activities of the sector have time and again boosted the growth of the economy. In the banking sector, the Public Sector Banks (hereinafter referred to as PSB) have been at the forefront of providing banking services to the remotest parts of the country with numerous welfare schemes and benefits for its customers. 

The PSBs undertake different banking operations throughout the nation with its focus on priority sector lending and providing aid through welfare schemes to the marginalized sector. Due to these reasons, there has been an increase in the stressed assets and an increase in the issue of Non-Performing Assets (NPA), and the government in order to maintain the credibility and trust of PSBs is justified to recapitalise the banks and introduce better plans/schemes to maintain the performance of public banks without affecting the flow of credit to productive sectors. The poor condition of the current and the pre-pandemic economy of the nation has led the government to take huge steps in changing the structure of the banking sector through its disinvestment plan. This article will reflect upon the reasons for privatisation of the PSB’s and its impact in the coming years.

Privatisation notification

The privatisation of PSBs has been a topic of debate for a long time due to the gradual decline of the economy and the increasing debt of the PSBs. The driving factor behind the nationalisation of banks was the concern towards failures of banks, accountability, and the stability of the banking sector in India. In order to address social concerns, accelerate the banking sector, and stabilise the growth of the economy, and development of the nation, the government took control of the banks.

According to the recommendations of the PJ Nayak Committee, the lower productivity, steep erosion in asset quality and demonstrated uncompetitiveness of public sector banks over varying time periods (as evidenced by inferior financial parameters, accelerating stressed assets, and declining market share) and the recapitalisation of these banks will impose significant fiscal costs. The government in order to maintain steady growth of the economy, sound health of the banking sector, and solvency issues of the PSBs, has to either privatise PSBs and allow their future solvency subject to market competition or to provide a structure or scheme that provides for the ability of PSBs to compete successfully in the market. 

The government, influenced by the recommendation of the committee and due to the reasons mentioned in the article, has decided to proceed with giving up control of public banks. However, the privatisation drive will bring down the control of the government from fifty-one percent but still, the government will enjoy the majority shareholding of the bank. 

Finance Minister Nirmala Sitaraman, in the budget speech of 2021-2022 announced privatisation of two PSBs as a part of its disinvestment plan. In order to facilitate the privatization plan, the government is likely to amend the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 which brought the nationalisation of the banks.

Reason for privatisation

There are numerous reasons behind the privatisation rationale with the declining economy being the primary and the most important reason. The Indian economy has been severely hit by the ongoing pandemic due to which the government has taken such bold steps of disinvestment. The rising NPA problem has also become a driving factor for the privatisation drive. The biggest contributors of NPA are the PSBs due to their welfare state schemes and loan waivers etc. The government, through the privatisation of PSBs seeks to minimise the NPA issue and ease the burden on the PSBs. 

Further, there is an issue of dual control, i.e. the dual control of PSBs by the Ministry of Finance through the Banking Regulation Act, 1949 and the RBI Act, 1934. The RBI, unlike private banks, does not have autonomy in the governance of PSBs as there is a constant intervention of the government that tends to politicise the normal functioning of the PSBs. The privatisation of PSBs has stirred a huge debate across the nation with an economic and political analysis of the decision. This article seeks to present both the negative and the positive impacts of privatisation on the Indian economy. 

Negative impact

  • Outside the purview of RTI, CVC, etc

According to the plan/scheme of privatization, the private sector banks will not be subject to a dual-channel of scrutiny by the Ministry of Finance and the RBI as in the case of PSBs. The private banks will have limited applicability of Right to Information (RTI) and will bring the private banks outside the scope of external vigilance enforcement through Central Vigilance Commission (CVC) and Central Bureau of Investigation (CBI), which tends to be a negative impact from the depositor’s perspective. 

The mechanism of RTI and vigilance of external bodies like the CVC and CBI raises the level of accountability and ensures protection from any foul play. This, however, has not always been the case as PSBs, despite having such mechanisms along with the RBI as the watchdog has erred in the governance of PSBs through various scams, unprofitable lending, and the rising NPA problem which impacts the interest of the public at large. Consequently, private banks will not be subject to the dual-channel of governance of the RBI and the Ministry of Finance in addition to the external vigilance as the only authority to which they are accountable is the RBI.

  • Issue of accessibility

Rural banking will definitely be a major challenge for the privatization drive as the PSBs have dominance over the accessibility to rural areas. The PSBs have branches across the country and at almost each and every district, unlike the private banks whose presence/reach can be seen in the more developed or populous areas of the country. Such a dominance/reach of the PSBs across the country would definitely be hard for the private banks to match. Assuming that the private banks take over the existing branches of the PSBs in the rural areas; it will still pose great difficulty in terms of governance and maintenance of those branches and most of all building an equivalent trust amongst the rural masses in comparison to that of the PSBs.

  • Inclination towards profit-making

The main consideration that drives the private sector banks is profitability. Private banks are inclined to make profits and, in some cases, serve the interest of the promoters as was recently evident from the case of YES Bank. Since the end result of private banks is to make profits, the concept of a welfare state as adhered to by the PSBs may suffer. The PSBs acting in the interest of the welfare state extend low-cost services, provide the depositors with subsidised accounts and various other governmental schemes linked to it. These PSBs at the behest of changing political landscape regularly provide the option of loan waivers and write-offs to the marginalised population. 

The private banks on the other hand, due to their profit-centric approach may impose high service charges on banking transactions to meet their operational costs and expenditure and may also create a disparity between the rich and the poor in terms of loan sanctions and a higher rate of interests on loans leading to unequal distribution of wealth in a different section of the society.

  • Private players are prone to failure

The biggest advantage that the PSBs have over the private banks is that the PSBs are backed by the sovereign. They are not prone to complete failure or becoming extinct as there is always a chance of recovery due to the support of the government. The most recent example is the restructuring of the Punjab National Bank (PNB) wherein, the government intervention by way of debt recovery and restructuring of the assets of the bank is sought, after the failure of the PNB due to frauds, scams, and its failure to generate enough cash flows to keep it afloat. 

The private players on the other hand have the option of exiting the market in the event of its failure which may leave the customers of such banks without any remedy. The profits of the private banks go to the shareholders. However, in the event of losses leading to failure, the government is left to make good the deposits either through insurance or through taxpayer bailout. In the case of CITIBank, the bank due to its business strategies recorded more than $130 billion of write-downs on its loans and investments. The US government, to prevent the failure of the bank, injected $45 billion of new capital into the bank and provided it with $500 billion of additional help in the form of asset guarantees, debt guarantees, and liquidity assistance, which is a perfect example of the bank’s bailout with public money. Therefore, it would not be correct to say that a larger bank (be it public or private) will have the capacity to absorb huge losses and will not fail as a result.

Positive impact

  • Mitigation of the NPA problem

The most debated issue of the privatisation drive and its impact on the economy is the ever-increasing and never-ending burden of the Non-Performing Asset (NPA) problem. The banking sector is overburdened with NPA and the majority of it is contributed by the PSBs which is majorly due to spending on welfare schemes and write-offs but is still a major issue to be dealt with for effective and speedy growth of the economy. The financial health of the economy is badly affected by the rising NPA issue. Privatization of PSBs will not end the NPA problem, but will surely aid in effectively bringing it down. 

The privatisation drive will definitely help in effectively reducing the NPA issue and boost the economy by recapitalizing PSBs with the help of raising fresh equities thereby empowering the banks to resume lending, improve their performance and simultaneously privatise their ownership structure. The dilution of the government’s stake in the PSBs by bringing fresh equity and foreign investment may give the debt-ridden PSBs a push towards recovery and growth.

  • Macroeconomic stability post-COVID

The privatisation drive will have a positive impact on the economy during the pandemic by bringing stability at the macroeconomic level. Privatisation of a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs. The pandemic has led to the severe decline in the economic curve of the nation and has made a negative impact on banks as a whole, which makes it all the more necessary to revive the banking sector. The recapitalisation of banks through systematic disinvestment of the government holdings and raising equity through private players including foreign investments will help the economy in achieving buoyancy post-pandemic.

  • Administrative efficiency and quality of customer service

The aspect of administrative efficiency plays a key role in the smooth functioning and governance of a bank. The administrative efficiency of a private bank as compared to PSBs is better. The overall customer service is better in a private bank. Therefore, privatisation of PSBs will bring about an enhanced customer service experience. The increase in tech-driven products and ease of banking services will also help in improving the overall administrative efficiency and customer service. These tech-driven products will also enable the private banks to increase their reach in the rural banking sector and provide quality services to their customers.

  • Competition

Another pet of privatisation is the competition in the market. The privatisation drive will provide the private players a level playing field with increased competition in the market which will eventually drive the private banks to perform better and increase their efficiency. The private banks, due to increase in the competition, will introduce innovative products that focus on specific consumer preferences keeping in view the risk assessment, risk improvement, product pricing, and lower service costs.

  • Capital infusion and foreign investment

India has a great potential of an influx of foreign investment wherein infusing more capital into the banking sector will give a fillip to the already suffering economy. The PSBs as compared to the private banks have been less aggressive in lending, attracting deposits, and in setting up branches. The banks in the public sector are often reluctant to make credit decisions owing to the fear of agencies and regulators. The influx of foreign investment will allow the private banks to take more risks to bring in better products, aggressive lending, development in the rural areas, and providing low-cost services and lower interest on loans. The infusion of capital along with the growing technology will help the private banks to provide easier and speedy services via net banking and mobile banking particularly in rural areas, thereby developing the rural banking landscape.

  • Job creation

The privatisation of PSBs will enable the private banks to create more job opportunities for individuals with specialised expertise in banking, finance, and technology to meet their target-oriented requirements with improved infrastructure and effective manpower.


The banking sector in India is one of the largest contributors to the growth of the economy and is evolving at a steady pace. However, the banking sector, especially the PSBs has had a huge impact on a decline in the economy due to the ongoing pandemic. To amplify the growth of the economy and the sector, the decision of the government to privatise the PSBs will prove to be a structural change in the banking sector by opening it to private players, increasing capital inflow and foreign investment which may become a boon to the emergence of the new age for banking sector eventually resulting in economic resilience of the country. Privatising the PSBs will pump the competition in the market and lead the debt-ridden PSBs towards a steady path of growth.



Please enter your comment!
Please enter your name here