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

Poonam Gupta and Arvind Panagariya

No 141, NCAER Working Papers from National Council of Applied Economic Research

Abstract: Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy and their stakeholders. 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. Due to its better performance and adhering to the development view of the PSBs, we propose that the State Bank of India (SBI) may remain under government ownership for now, but all other banks should 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.

Keywords: Bank credit; Public sector banks; Privatization; India (search for similar items in EconPapers)
JEL-codes: E23 G21 G28 K23 L33 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2022-08-03
New Economics Papers: this item is included in nep-ban and nep-reg
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Journal Article: Privatization of Public Sector Banks in India Why, How and How Far? (2023)
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