India RBI staff warns against rushed sale of state-run banks

Bloomberg

Rushing to sell Indian state-run lenders to private investors may hinder the government’s financial inclusion efforts and monetary policy transmission, staff at the country’s central bank warned.
“A big bang approach of privatization of these banks may do more harm than good,” wrote staff including, Snehal Herwadkar, in a research paper. The report recommended a gradual approach to selling government-controlled banks to private investors to ensure that “large scale privatization does not create a void in fulfilling important social objectives of financial inclusion and the monetary transmission.”
The warning comes as, despite stiff opposition, the government is set to seek expression of interest from
investors to buy a stake in
IDBI Bank Ltd. and plan to privatise two other state-owned lenders.
The RBI has largely stayed silent on the sale plans so far, and according to a footnote to the study, the authors’ views didn’t represent that of the central bank.
The decision to privatise state-owned banks and other entities is sensitive and unpopular among its employees in India, as government-run companies’ jobs are prized for their apparent stability and social security. Hence, though the government sees it as an important reform, unions and most opposition parties strongly object to the step.
Though private banks are more efficient in profit maximisation, public sector banks were superior in labour cost efficiency and promoted financial inclusion better, according to the study. Lending by state banks is less cyclical than private banks, and thus, the former “help the countercyclical monetary policy action to gain traction,” it said.