Are there any real Costs and Benefits of Public Banks?

There have been ample discussions on the topic from decades and both the opposing and favouring sides have ample arguments to prove their point. Some might argue on the low quality of service provided by public banks with lengthy procedures and others might argue about higher interest rates charged by private banks. But need of the hour is to study what are the effects of privatization of banks at grassroots level.

Talking about positives of privatization of banks, everyone knows of the focus on digitization and ease of operation they offer. The working of private banks is more professional than public banks and very competitive which brings to customer an array of new schemes every couple of years. With privatization of the sector the burden on government is reduced. Furthermost, the politicized launch and use of banking schemes such as loan waiver etc. could be avoided. This way the private banking sector proves to less risky and brings in foreign capital through Foreign Direct Investment (FDI) or Foreign Portfolio Investment (FPI) modes, thereby increasing the circulation of Foreign Exchange in the economy and giving the economy a much needed boost.

Now coming to downsides of the privatization of banks, everyone knows the private banking sector is present to do business and not give service for which they do not seek return. Although public sector banks may become victim to many a political schemes and agendas, not all political actions prove to be bad. Many government schemes like “Jan-Dhan Yojna” and “Pension Yojna” worked well and also became successful only because they were applied in Public Sector Banks. Public Sector banks with social welfare agenda continue to run branches in rural segments of the country where they might operate at loss but still continue operations, but private banking sector having profits as priority might not do so. Although private banks are far more efficient but they favor customers with better credit scores and people who might already have access to credit thereby widening economic gap.

The following results are from time-performance study done by World Bank in Brazil after bank privatization movement on Branch Lending Supply and Operation. Considering factors of ‘Lending’ & ‘Closure Probability’ by Privatized banks and Non-Privatized banks after movement. The following data figures show coefficient estimates from a panel regression of branch lending and branch closure probability on dummies analyzed on quarter yearly basis. In Brazil the data revealed decrease in lending supply by almost 45.6% and reduced branch operation of almost 20.9%. However, public banks which were not privatized did not decrease any the provision of credit or the probability of branch closing. 

Further study on Local Financial and Economic Effects in Brazil after privatization movement revealed the following outcome:  

The data at local level showed a huge shock on the economy. Localities where privatisation occurred showed contraction in economic and financial outcomes. Local lending was down by 29%. This in turn led to contraction in employment, hours worked, and wage bill of about 6%-8% below their trends. Such factors could fuel the credit market concentration and stray nation from financial deepening proving disastrous for Small and Medium Scale Enterprises. 

However, the privatized banks themselves showed gain and increase in returns on assets after privatization of about 7%, thereby strengthening their own financial stability, solvency, and liquidity, and decreased non-performing lending.

Conclusion 

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”. But it is for us to examine the outlook of privatisation of public sector banks. On the positive side it will help public sector banks to reduce their NPA and rid themselves of being political scapegoats. On the downside private sector banks will lookout for profits rather than serving nation and prefer only urban centred locations. Whatever be the fate, evolutionary changes rather than revolutionary should be the way forward in financial sector.