Big Bang Privatization Can Do More Harm Than Good, Says RBI

The national council of applied economic research (NCAER), on the other hand, reportedly, said that all public sector banks, except the State Bank of India, should be privatized

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The Reserve Bank of India (RBI), in its article issued on Thursday, has stated that big bang privatization of public sector banks (PSBs) can do more harm than good. RBI also said that, while PSBs are more efficient in profit maximization, their public counterparts have done better in promoting financial inclusion.

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"Privatization is not a new concept, and its pros and cons are well known. From the conventional perspective that privatization is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it," said RBI.

The central bank also suggested that the government should have a gradual approach to privatization as it can ensure that a void is not creating in fulfilling the social objective of financial inclusion and monetary transmission.

Citing various study reports, the bank said, "PSBs have played a key role in catalyzing financial investments in low-carbon industries, thereby promoting green transition I countries such as Brazil, China, Germany, Japan and in the European Union. The studies suggest that public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private sector banks."

As per today's reports, RBI clarified that it is not completely against privatization of public sector banks. "The researchers are of the view that instead of a big bag approach, a gradual approach as announced by the government would result in better outcomes," said RBI in a statement.

Meanwhile, on the other hand, the national council of applied economic research (NCAER), reportedly, said that all public sector banks, except the State Bank of India, should be privatized.

In the NCAER policy paper penned by Poonam Gupta, director and Aravind Panagariya, former Niti Aayog vice-chairman, stated that, "In principle, the case for privatization we have made applies to all PSBs including SBI. But we recognize that within the Indian economic framework and political ethos, no government will want to be without a single PSB in its portfolio. Keeping this in view, the goal, whether stated explicitly or left implicit, should be privatize all PSBs other than SBI."