The Reserve Bank of India (RBI) has warned the government against the big bang privatisation of PSU banks, saying that it may do more harm than good. Instead, the banking regulator has called for a gradual or nuanced approach so that important social objectives of financial inclusion and monetary transmission are not affected.

RBI researchers said public sector banks have fared better than their private sector counterparts when it came to providing loans to the needy in rural areas and semi-urban areas.

They have also played a ‘counter cyclical’ role by consistently allocating a larger proportion of their total credit to agriculture and industry than the private sector banks (PVBs) and also reduced interest rates more during the last easing cycle.

While the Union government has announced its intention to privatise two state owned banks, the Opposition parties have in the past alleged that the ultimate plan is to sellall PSU lenders.

In an article published in its August bulletin, RBI researchers Snehal Herwadkar, Sonali Goel and Rishuka said an important aspect that is often ignored by analysts proposing privatisation of banks is the role played by PSU banks in financial inclusion.

While the government has already announced its intention to privatise two banks, a ‘gradual approach’ would ensure that large-scale privatisation does not create a void in fulfilling important social objectives of financial inclusion and monetary transmission.