Why privatizing Government banks is a bad idea

The Finance Minister recently announced that “Other than IDBI Bank, we propose to take up the privatization of two Public Sector Banks and one General Insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this Session itself”

After this announcement, as usual, the business honchos, economists, Media pundits applauded the proposal. A couple of years ago, whenever I heard these heavyweights talk, I used to think they have a reason or logic when they supported the announcements. After analysing the outcome of their views on several occasions, I realized that they are just talking to get space in the media or for photo ops. They don’t mean anything. I guess, privately, they may be thinking exactly the opposite of what they speak in public.

Disinvestment, asset monetization, and strategic sale. Hope the readers know the meaning of these terms.  They are heavy words but mean nothing other than selling Government Assets, Properties, and companies to private people, for a price. These assets were acquired or built by our ancestors and governments over the years. The money that the government gets by selling these assets will be consumed and no alternate assets are acquired or built.

However, I understand that if the factories run by the Government are under stress/loss, they can be sold to the private sector. If they want to sell Air India, BEL, BEML, BHEL, SAIL, etc., it is fine. If the Government feels these institutions are run inefficiently, sell them off. The common public, except the employees, won’t bother much about it.

But selling Government banks will surely hurt the general public. Surprisingly, social media, forums, or associations are not raising their concerns on this move.

Take for example – Global Trust Bank (GTB) became bankrupt. The then Finance Minister announced the merger of this bank with Oriental Bank of Commerce. The interest of depositors was protected.

Recently YES Bank collapsed. A consortium of banks led by SBI bailed out the depositors.

You may also know these facts – People who invested in Tier I Bonds of YES Bank got NOTHING. Investors of NCDs in Lakshmi Vilas Bank got ZERO money. Depositors of a large cooperative bank in Bangalore got nothing to date.

No pension in India – Sadly, the Economists compare the Tax rates in India Vs rates in Developed countries and cheer that the rates in India are at par or competitive. But they fail to appreciate the fact that in those countries, aged people get pension.

Except for Retired Government employees, no one else gets a pension in India. There are some schemes like pension from PF etc., which is so paltry, that it can’t even buy a single cup of coffee per day!

So, the retired private citizens need a sort of assurance on their deposit/capital earned by them over the years. The only assured option is a deposit in Government Banks. (Forget about Deposit Linked Insurance Scheme, which assures a meagre Rs.5 Lakhs). The moral and unwritten guarantee that the Government of India won’t and can’t fail alone is sufficient to keep the funds safely. Banks will collapse only when there is a run on the bank and the Government backing is sufficient to deter the citizens from withdrawing the funds from Government banks, even if it is slipping. Thus, money in Nationalized Banks is safe till date.

If the Government privatizes the Nationalized Banks, let me know, where the helpless aged citizens should go in search of safety? This year, they propose 3 banks and likewise, they may privatize all the banks over the next couple of years. THIS IS DANGEROUS. Mark my words, people will suffer a lot on account of this move alone.

Tax payer’s money is used There is another section of the population who advocate a theory that the tax money is used to bail out the failed or bad banks. I can tell you if that is the case, so be it. Why are you crying? All the deposit holders in the nationalized banks or private banks are taxpayers now or in the past. They did contribute to the Government when they were earning or continue to contribute to taxes out of interest income, dividends, etc. If their deposits are to be bailed out now, so be it. Government can do so much in return to the genuine taxpayers. No harm.

So, I don’t subscribe to this thought that using taxpayer’s money to bail out banks is a bad idea. After all, every individual needs a shoulder to lean on when they stop working. Instead of going with a begging bowl to the Government, they are parking the money in Nationalized Bank. Do you want to take away such comforts also?

My dear Government, privatize anything and everything, including Government offices and building, we are fine with it, but spare NATIONALIZED BANKS, please. Crores of citizens including retired, aged people have kept their hard-earned money in these banks and leading a peaceful life. Don’t’ take away their joyful advanced years. Fear of losing money till one’s death is as good as dying daily.

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About B E Kumar Prasad

B E Kumar Prasad
He is a Practicing Chartered Accountant in Bengaluru, India. He has 25+ years of experience in income tax, business setup, and NRI matters. He is also an Insolvency Professional and Registered Valuer (F&SA).Prasad welcomes your comments and questions. Please email him at [email protected]

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5 months ago

Well written article, apt to the times, however as mentioned no hue or cry in social media over this topic, intersting..

Dr TV Gopalakrishnan
Dr TV Gopalakrishnan
5 months ago

The main reason to privatize the psbs is to get some funds to tide over government financial issues. The return from these banks to the Government is practically nil . Over and above that the Government has to maintain these white elephants sacrificing economic development and other fringe benefits. The only way perhaps to save these banks from privatizing is to make them work professionally with full accountability for lapses. Even this is not ensured in Private sector banks the way the loot and frauds take place in them . As long as Govetnance is missing and anybody can get away with any nonsense one cannot expect any improvement from the banking sector. Unfortunately the Government is in need of funds and Governance is not possible for obvious reasons , the only option is to privatize and encash the assets ignoring all good sides of the issue. Middle class has to suffer and they are the worst lot in the present circumstances.

5 months ago

Well written contrarian view. Makes sense, keeping in mind the concerns of a big chunk of the public which depend on the safety of their money in the national banks.

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