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 key role in the banking sector.

 14 private banks were nationalised in 1969, with an idea to align the banking sector with the socialistic approach of the then government; in 1980, 6 more private banks were nationalised. 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 majority of its stake is held by the Government. The Public Sector Banks are classified into two groups as:

  • Nationalized Banks 
  • State Bank and Associates

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

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

Advantages of Privatization of Banks

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

  • The foreign investors prefer to invest in private sector banks rather than the 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 

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, with the rest either consolidated with strong banks or privatised; this leads to several undesirable situations. Some of these are:

  • The privatized banks will focus on maximizing their profit and it will put an adverse effect on the middle class and poor people of the society.
  •  Private Banks are ruthless to poor and support the rich people of the society. This concept will lead to widespread economic gap, make 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 serious problems of job losses.
  • Government has to face difficulties in implementing social welfare schemes.

Reasons for Privatisation: 

Government justifies its stand on the following grounds:

  • Years of capital injections and governance reforms have not been able to improve the financial position of public sector banks significantly.
  • Many of them have higher levels of stressed assets than private banks, and also lag the latter on profitability, market capitalisation and dividend payment record.
  • 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. The first set of banks will be dominated by a few large Indian banks with 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 co-operative 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 through banks as their agents or associates.


  •   It is wrong to believe that private sector banks are safe bet. Dubious lending, inefficiency, under reporting of NPA etc. were noticed in private sector banks; the government intervened to rescue of 3 such banks during 2020.
  • Though the gross bad loans of government banks are quite high, it is the private sector which contributes 97 per cent of bad loans. Most of these loans were granted 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.

Very little opposition:

The proposal of the government to privatise the nationalised banks has not faced serious opposition from the public, because they wrongly believe the myth propagated by capitalists that privatisation is the only solution for all economic ills. This is fuelled by the apathy of the government bank employees towards customers and 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 for making PSBs into a corporation like Life Insurance Corporation (LIC) while maintaining government ownership; this will give more autonomy to PSBs. Or, they could accept the challenge to run their respective banks in a cooperative way by employees themselves.


According to PROUT the banking system is indispensable for promoting both collective welfare and the all-round economic advancement of people and its fundamental aim is to “Keep money rolling.” The value of money increases with its mobility. That is, the more that money changes hands, the greater its economic value. On the other hand, the more that money 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 past experience has shown that dishonest business people have seldom protected the hard-earned savings of ordinary depositors. Many have profited by 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 central or federal bank will be controlled by the immediate or local government.

 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 the banks threatened the life of the common people. This more or less still occurs today not only in undeveloped 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 not only ruins 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 in turn jeopardizes internal trade and commerce as well as foreign trade and barter. Even if there is abundant production in a country, the common people do not benefit. The rich become richer and get more scope to continue their merciless exploitation.

 PROUT opines that the banking system must continue; otherwise the mobility of money will be hindered. If people oppose the banking system because they are guided by selfish whims or any other sentiment, then their economy will stay 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 all business enterprises should be directly controlled by the state so that people will be free from exploitation. Others argue that all businesses should be run by cooperatives so that people will be able to control their own economic destiny. Still others argue that businesses should be owned by private enterprise and that greedy exploiters should be controlled through legal means; 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 three tiered industrial structure, i.e.-private, government and cooperative    (the largest sector of economy). There will be no chances of overlapping of economic activities. In the collective economic structure of PROUT, the profit motive has no place – here industry is for consumption.  PROUT believes that there can be harmonious adjustment between individual right and collective spirit if we follow, in practice, the spirit of Sama-Samaja Tattva (the Principle of Social Equality), the teachings of Neohumanism in our individual and collective lives, on the basis of rationalistic approach; the principle of limited freedom in the physical level, as it is finite; and the policy of full freedom in the spiritual and psychic worlds, because they are infinite in scope.

True, it is not the business of a government to indulge in business or trading; but the motivation and purpose behind PROUT’s political system is basically to administer in such a manner that economic institutions are able to materialize the principles and policies of a progressive economy, and that the 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 obvious that the Private Bank will be aiming at maximizing their own profit. In an irrational move of blindly privatising the economic activities, the Indian government is shirking its basic responsibility.  


5 April 2021

Ganesh Bhat

Author: Ganesh Bhat
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