Understanding Privatisation Of Banks Pros And Cons: Banks today can also be referred to as the engine powering the Indian economy.

Not much explaining is required when you hear the term – Bank. Everyone has the most basic understanding of what a bank does – Accepts deposits and lends credit and loans.

In this blog, we’ll dive a little deeper into the inner vault of banking in India, and cover one topic in detail – The privatisation of banks pros and cons. 

Before we get into the main topic, let’s understand private and public banking and its history in India.

History of Banking In Post – Independent India

The first bank in India, named “The Bank Of Hindostan” was established in 1770, almost 250 years ago. The bank operated for 60 years before it eventually failed.

Then came the State Bank Of India. It was established in 1806 under a different name – Bank Of Calcutta. 

The Bank Of Calcutta went through several name changes –

  • Renamed as “Bank Of Bengal” by the British Government.
  • Merged with Bank Of Madras and Bank Of Bombay to become Imperial Bank Of India. 

India’s singular banking authority, The Reserve Bank Of India was established on 1st April 1935, under the RBI act of 1934. The Indian government took steps to nationalize 14 major Indian banks in 1964.

Additionally, 6 more banks were nationalized in 1970, 6 years later. 

Basic Functions Of Banks

Banks have multiple operations, beyond lending and borrowing. Today’s banks provide multiple services to their customers & clients. Some of the functions of banks are –

  1. Accepting Deposits
  2. Issuing Credit & Loans
  3. Safety Deposit Lockers
  4. Foreign Currency Exchange
  5. Insurance
  6. Mutual Funds

Public Sector (PSU) Banks & Private Banks

A PSU Bank is a bank where a majority stake is held by the government of India. They are subdivided into 2 types –

  1. Nationalized Banks and
  2. State Banks

A private bank on the other hand is owned majorly by shareholders. This includes promoters of the bank and other stakeholders. 

Now that you’ve read about the basic understanding of banks, let’s look at the Privatisation Of Banks Pros And Cons. First, we’ll start with the pros of privatization of PSU banks.

Pros Of Privatization

  1. Private Banks have much bigger profits than PSU banks. Privatization could turn PSU banks into profit-making machines.
  2. Also, private banks outperform their government counterparts because they are not hampered by the government’s red tapism.
  3. Investors are more likely to invest in private banks over public government-owned banks.
  4. Private players are stringent when it comes to lending money and even more so when it comes to asset recovery.
  5. Privatizing a government bank reduces the burden on the government due to fraud, bad debt, and non-performing assets. 
  6. Reduced government interference in management.

Cons Of Privatization

Now, private banks are obviously having the upper hand against government PSU banks. They hold a heavy advantage over the government banks but, privatization still has its limitations.

  1. With private banks focusing on only generating profits and increasing revenues, people in the lower and middle-income classes will face most of the heat. This is because most of the PSU bank customers are from these 2 economy classes. 
  2. Generally, people tend to trust government PSU banks over private banks with their deposits.
  3. Government schemes that support various causes like the “Jan-Dhan Yojna” and “Pension Yojna” are successful with PSU banks but the same success cannot be guaranteed with private banks.
  4. Public banks function on the principle of social welfare over profits. This is not the same principle that is followed by private banks.
  5. Becoming a private bank is not a promise of being completely transparent and ethical in terms of doing business. 

The Impact Of Privatization In India

Turning a public sector bank into a private one has its own benefits for the economy of the country as well as its shareholders.

It could also create a stable structure for the banking system as a whole. But this does not mean that the services and products offered will be at the same level for all classes of people. 

As we have seen, public sector banks operate in rural areas, serving mostly the lower and middle-income classes. This could disappear if all the public banks turn private, as their main focus is profitability and growth.

The type of support offered at the expense of profits by public banks is unlikely to be seen by their private counterparts. This could be another impact as well. 

Also Read: Top Penny Stocks Held By SBI (State Bank of India)

In Closing

Banking as a whole is an imperative sector for the growth of the economy, for businesses, and for citizens. While we have seen public banks support social welfare, private banks focus on strict growth, profits, and an overall reduction in underperforming schemes in services. 

Carefully looking at both sides of the coin, we must decide whether privatization is the future of banking altogether. That’s all for this blog. Thank you for reading our article on Privatisation Of Banks Pros And Cons, Happy Investing!

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