A big bang approach of privatisation of public sector banks may do more harm than good, according to an article published by the Reserve Bank of India.

In the Union Budget 2021-22, the government announced its intent to take up the privatisation of two state-run lenders.

Such a gradual approach would ensure that large scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission, the RBI says.

Privatisation of public sector banks has been widely viewed as a key area of pending reforms in India.

However, an important aspect that is often ignored by researchers proposing privatisation is the role played by PSBs in financial inclusion, the RBI says.

From the conventional perspective that privatisation is a panacea for all ills, the economic thinking has come a long way to acknowledge that a more nuanced approach is required while pursuing it, the banking regulator adds.

Public sector banks are not entirely guided by the profit maximisation goal alone and have integrated the desirable financial inclusion goals in their objective function unlike private lenders, the RBI says.

"In the recent years, these banks have also gained greater market confidence. Despite the criticism of weak balance sheets, data suggests that they weathered the Covid-19 pandemic shock remarkably well," the RBI notes.

The recent mega merger of PSBs has resulted in consolidation of the sector, creating stronger and more robust and competitive banks, says the RBI.

Public sector banks have consistently allocated a larger proportion of their total credit to agriculture and industry than private lenders, the RBI says, adding that the share of co-operative banks in agriculture lending has reduced while that of PSBs has increased.

PSBs also have a lion's share in infrastructure lending and their role has been especially crucial against the backdrop of withering away of erstwhile development financial institutions.

State-run lenders are also more effective in monetary policy transmission, aiding the countercyclical monetary policy actions to gain traction, says the central bank. During the last easing cycle for example, their reduction in lending rates was substantially higher than that of PVBs. At the same time, their deposit rates were relatively stickier as compared with PVBs.

The resultant higher net interest margin (NIMs) of private banks is an indication of their profit maximisation objective, the RBI points out.

PSBs account for the highest share of bank branches in rural areas, followed by semi-urban areas. As of July 2022, more than 45 crore Pradhan Mantri Jan Dhan Yojana beneficiaries have been banked and 78% of these accounts were in PSBs.

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