India Should Privatize Its Banks, Fmr. RBI Leaders Say
Viral Acharya, Fmr. RBI Deputy Governor
During the 2024-2025 Union Budget speech, Finance Minister Nirmala Sitharaman notably did not provide guidance on the privatization of two state-owned banks (called public sector banks, or PSBs) and a general insurance company, a plan that she had once promised to follow through on in the 2021-2022 Union Budget announcement. Such ideas gained popularity following the $32 billion bailout India conducted of its PSBs in October 2017. For years, PSBs have been a drain on the Indian budget and crowded out the private sector banking industry. Research also finds private sector banking to be far more efficient, far less likely to have stressed assets while providing far more capitalization, far less susceptible to fraud as a percent of total assets, have a steeper and faster-growing return on equity, can more quickly grow bank branches, far less likely to accumulate defaulted loans, and have faster-annualized growth rates through any historical period, all while relying far less on government bailouts and backstops (NCAER).
Following the 2024-2025 Union Budget, fmr. RBI Deputy Governor Viral Acharya argued it was time for India to privatize its PSBs. Fmr. RBI Governor Raghuram Rajan has also argued for the same in the past.
Currently, the government of India has a majority stake in 12 banks (% owned by the government, as of March 2023): State Bank of India (57.59%), Canara Bank (62.93%), Bank of Baroda (63.97%), Punjab National Bank (73.15%), Indian Bank (79.86%), Bank of India (81.41%). Union Bank of India (76.99%), Bank of Maharashtra (90.90%), Central Bank of India (93.08%), UCO Bank (95.39%), Indian Overseas Bank (96.38%), and Punjab and Sind Bank (98.25%).
PSBs represent 58.31% of India’s total banking assets (including public, private, and foreign banks) (IBEF), and operate 75% of bank branches in the country (excluding foreign banks). Historically, PSBs have been up to 90% of the banking sector. India’s government entered the banking space in 1955 by acquiring a 60% stake in Imperial Bank of India, which was then renamed State Bank of India and remains the country’s largest PSB and third-largest bank overall. In 1969, Indira Gandhi’s government nationalized 14 major banks.
By 2020, the Indian government operated 27 national banks. Under pressure to liberalize and increase efficiency in its financial markets and privatize many of the banks, FM Sitharaman consolidated the banks into the 12 PSBs operated today.
PSBs weaken the economy by allowing major parts of the banking system — the lifeblood of India’s financial markets — to operate under immense moral hazard. With the taxpayer providing a constant backstop to any defaults, the Indian banking system is plagued with poor investment decisions and loan defaults that reduce liquidity, limit the country’s ability to develop efficient capital markets that can be used to finance new businesses and projects, and dissuade investors from putting money in India where the return on equity is reduced. Research overwhelmingly finds that PSBs accumulate large amounts of non-performing assets (loans in default) that constantly require taxpayers to bail them out to avoid financial crises. Without an efficient financial sector, India’s growth will be dampened.
