Privatization of Public Sector Banks in India Why, How and How Far?

Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy. The underperformance of PSBs has persisted despite several policy initiatives during the past decade. Meanwhile, private banks have further improved their performance and have gained significant market share. In this paper, we have made the case for privatization of PSBs. Keeping in view India’s development needs and superior performance of the State Bank of India, we propose that the latter be held in the public sector for now but all other PSBs be privatized. In order for them to set an example for the success of future privatizations, the first two banks for privatization should be the ones with better asset quality and higher returns. The most critical element for privatization to succeed would be the withdrawal of the government from the post-privatization board of the bank. The paper proposes a couple of different pathways to successfully transition the sector toward private ownership. It cautions that the status quo will result in further erosion of the market share of PSBs toward oblivion, while impeding India’s economic growth and inflicting substantial costs onto the depositors, firms, taxpayers and the government as their majority owner in the interim.