Soaring profits are no reason to go slow on banking reform

livemint.com:

count of PSBs in India to 12 from 27 got policymakers to step off the pedal. Now with swelling profits stuffing public coffers, off-loading banks may slide further down the priority order. But banking remains much too public-sector dominated.

Government equity control must come down, so that these banks are subject to market discipline, with private owners keeping watch. As a business of judging risk and pricing credit, banking tends to perform best over time when bank managers are held to account by a crowd of owners united only by profit as a common interest. Which is why this upswell should be taken as an opportunity to privatize PSBs.

The finances of PSBs have never looked so robust. Their net profits hit ₹1.4 trillion in 2023-24, up 34% from 2022-23, while bad loans as a proportion of their total advances are at a decadal low of under 4%. These bright numbers are reflected in the stock-market strength of listed lenders.

It is no surprise that private banks have performed even better. Ever since being allowed in, they have been taking business away from PSBs. Their net profits grew a stronger 42% to ₹1.7 trillion in 2023-24.

The loan books of private banks also look cleaner, overall. With credit growth in good shape across the sector, most banks look reasonably well placed right now, even if their tilt towards retail lending over corporate loans isn’t ideal. The big policy question is whether and when further chunks of PSB equity will go private.

The sense that this process may have stalled stems from the government’s failure last year to privatize IDBI Bank as planned. In the context of this miss, reports had emerged that PSB privatization would be put through a rethink. The idea has always faced resistance.