A recent study conducted by the Reserve Bank of India(RBI) asserted that public sector banks (PSBs) must be privatised through a gradual approach rather than a big bang-approach for smoother functioning and to retain the socialist goals.
Backing the government’s idea in privatising two of the PSBs (likely the Central Bank of India & the Indian Overseas Bank), RBI stated that taking a gradual approach would prove more beneficial, as it wouldn’t negate the vision associated with the financial inclusion and monetary transmission in fulfilling the social objectives.
In general, the public sector banks unlike the private sector banks, have entirely different purposes. The private sector banks look for profit maximisation goals and have integrated the desirable financial inclusion goals as their main objective.
According to the study, the labour cost efficiency is higher in Public Sector Banks, whereas in private sector banks, its found to be at the lower end. Additionally, the PSBs also assist the government’s counter-cyclical fiscal policy actions to create demand in order to drive the economic boom.
“Recent mega-mergers of PSBs have resulted in the consolidation of the sector, creating stronger and more robust and competitive banks,” as cited in the study.
The Pandemic-inflicted by COVID-19 had enormously affected Public sector banks at a larger scale and they were constantly attacked for their weaker balance sheets. The state-run banks have been backed-up by the recently established bad bank or NARCL to erase the burden of loans and issues on non-performing assets.
The bad bank- National Asset Reconstruction Company Limited (NARCL) began its operation on March 31 onwards this year, and was structured to deal with strained assets in the loss-laden banking system. Nearly 15 cases worth ₹ 50,335 crores were transferred to the proposed bad bank. The study also highlighted that the recently constituted National Bank for financing infrastructure and development (NABFiD) will deliver an alternate channel of infrastructure funding, thus would help in cutting the asset-liability mismatch concerns of PSBs. These newly inducted reforms are likely to help in strengthening the infrastructural and core values of PSBs further.