How Government’s Reduced Shares in Public Banks Will Affect Us

The Banking Laws (Amendment) Bill’s Impact on Everyday Bank Users
December 4, 2024

One of the key proposals in the latest banking reform bill, which was debated in the Lok Sabha on Dec. 3, is to cut the government’s stake in public banks from 51% down to 26%. Some opposition members are calling it a move toward privatisation. There are at least four major concerns for citizens regarding Banking Laws (Amendment) Bill, 2024, that the government needs to address.

One, privatisation may lead to commercialisation.

When public sector banks are mainly owned by the government, they often have goals beyond just making money, like ensuring that banking services reach remote or underserved areas, supporting small businesses, and funding projects that may not be highly profitable but have social benefits. However, when these banks are privatised, meaning more of their ownership is transferred to private investors, their primary goal shifts toward maximising profits.

This can lead them to focus more on urban and commercially viable sectors where profits are higher, potentially leading to reduced services in rural or less developed areas where banking is equally needed but less profitable.

Two, it may adversely impact employment.

Public sector jobs are often considered more stable than private sector jobs, especially in countries like India where government employment is highly valued for its security and benefits. When a bank that was once government-owned starts moving towards private ownership, the new owners might want to make the bank more efficient and profitable. This often involves cutting down costs, which can mean layoffs or less favourable conditions for existing employees.

For example, job roles might be consolidated, branches in less profitable areas might be closed, and employment benefits might be reduced. These changes can create uncertainty and anxiety among employees about their job future.

Three, privatisation may result in financial instability.

Introducing private ownership can lead to better management practices in banks, as private investors look for returns on their investments and thus encourage the banks to operate efficiently and responsibly. However, this drive for profits can also push banks to take higher risks. For instance, they might offer more loans to people or businesses that may not be fully equipped to pay them back, aiming to get higher interest returns.

If such risk-taking isn’t carefully managed and regulated, it could lead to situations where the bank’s financial health is jeopardised—much like what happened during the global financial crisis in 2008. This is why even with privatisation, strong regulatory oversight is essential to keep the banks’ pursuit of profits in check and ensure they don’t take excessive risks that could lead to financial crises.

Four, it may hurt the government’s fiscal health.

When the government sells its shares in public sector banks to private investors, it raises a significant amount of money. This is similar to a person selling a large piece of property they own to get a lump sum of money quickly. The government can use this money to fund various public welfare programs like building roads, schools, or hospitals, which is a direct benefit.

However, by reducing its ownership in these banks, the government also potentially loses a steady stream of income in the future—money that these banks would pay out as dividends from their profits. Over time, this could mean less money available for public spending, which is a trade-off the government needs to consider.