International Journal for Multidisciplinary Research (IJFMR)

E-ISSN: 2582-2160 ● Website: www.ijfmr.com ● Email: [email protected]

Impact of Privatisation on of Banks Efficiency

and Profitability: Role of Privatisation
Khushi Gupta1, Ms. Pratiksha Jha2
1
Student, Galgotias University
2
Associate Professor, Galgotias University

ABSTRACT
There have previously been studies done on the effects of privatisation on bank profitability using data
from the five to ten years prior to privatisation and the seven to seventeen years following privatisation.
For the examination of the effect of privatisation on the profitability of banks, data from recent years (i.e.,
the last 4-5 years) have not been taken into account. Privatisation of banks eliminates irregularities, brings
timeliness, and will result in service responsibility. After privatisation, the results improved, increasing
their profitability.

JEL CLASSIFICATION: G21, G24, G33, G23, C23

KEY WORDS: Privatisation, Return on assests(ROA), Return on Equity(ROE),Investment

INTRODUCTION
The union government was obligated to own at least 51% of the shares under the 1970 Banking Act. It
was not a political decision when Mrs. Indira Gandhi nationalised the banks over night in two phases, first
in 1969 with fourteen banks and again in 1980 with six banks with various capital requirements. Millions
of people, and more specifically the most vulnerable in rural regions, did not have access to banking as a
public benefit back then.
Nationalised banks were deemed to have met expectations when the first wave of changes began in 1991,
ushering in barefoot banking and dramatically expanding reach through the Lead Bank Scheme and
Service Area strategy, all at the expense of efficiency. The reforms helped cleaning up the banks’ balance
sheets, introduced asset-liability management, prudential management, and better and responsible customer
service. Within fourteen years, they became symbols of inefficiency reflected in large accumulation of non-
performing assets (NPAs).
After 2005, the inclusive banking strategy gave rise to small finance banks, small payment banks, and
banking correspondents (BCs). With the exception of regional rural banks and urban cooperative banks,
there were 76 scheduled commercial banks in 1991. Today, there are 93 scheduled commercial banks.
The number of bank branches increased from 60,220 in 1991—35,206 in rural areas, 11,334 in semi-urban
areas, 8,046 in urban areas, and 5,624 in metropolitan areas—to 158,373 in 2022 (rural branches had the
least growth at 52,773; semi-urban areas saw growth at 43,683; urban areas saw growth at 30,638; and
metropolitan areas saw growth at 31,279). A branch currently serves 9,500 people on average, compared
to 14,000 in 1991.

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 International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: www.ijfmr.com ● Email: [email protected]

In terms of business, the banks had a loan portfolio worth Rs1.32 lakh crore and deposits totaling Rs3.8
lakh crore. After three decades, the credit portfolio has grown to Rs108.8 lakh crore, while the deposit
portfolio has surpassed Rs155.7 lakh crore. The credit-deposit ratio increased by more than twice, from
34.2 to 69.88 percent. In 1991, as opposed to 3% now, the cash reserve ratio, or the percentage of deposits
held by commercial banks with the central bank, was 15%. The RBI made sure that banks had greater
liquidity at their disposal to make responsible loans and meet societal demands.
Depending on how they perceive the risk, banks are able to set interest rates for various groups of
borrowers. The banks' fundamental information altered. even when technology replaced. The decadal data
from 2000 to 2020 shows an increase in both private and public sector banks' advances as well as their
NPAs. But to demand that banks stop taking risks in order to lend in the absence of NPAs would be
unreasonable. Additionally, the establishment of giant banks and Bad Bank would neither eliminate their
toxic assets or lessen their losses. When the monolithic SBI was established and the main PSBs were
consolidated to reduce the number of them from 28 in 1991 to only 10 today, the government disregarded
the lessons of the 2008 crisis that warned "too big to fail" banks would require more resources from the
exchequer than previously.
The regulator does not see private banks, foreign banks, and PSBs equally when it comes to fulfilling the
commitments to the priority sector. Although the key sectors after nationalisation were agriculture, small
companies, housing for the poor, education for the poor, and transportation, including boats and
catamarans, their makeup and substance have drastically altered over the past thirty years. The banks'
lobbying organisation, the Indian Banks Association, occasionally negotiated to change the priorities. The
40% of total financing set aside for this purpose is reduced for the underprivileged and needy, defeating
the goal of privatisation.

LITERATURE REVIEW
The financial history was seen as a series of nationalisations and privatisations, which were all jointly
safeguarded in states of competence and comparable community. The theoretical representations of various
ownership metrics seldom distinguish between competence and dominance (Vickers and Yarrow, 1988).
According to Kay and Thompson (1986), "Privatisation is a term that is used to protect numerous different
elements, and is probably another way to move the relations between the government and the private sector."
Serious problems with the competency of service firms have been explored.
The output of the banks and the labour is the quantity of transactions, whereas the input of the banks is the
quantity of credit applications and the quantity of accounts (Oral & Yolalan, 1990). The operating
performance ratio's ordinary three-year and pre-privatization periods correspond to three years, 18 states, and
32 industries in the value for 61 enterprises. Economically and statistically, post-privatization output increases
(Megginson, Nash, & Randenborgh, 1994). According to the study's findings, improved performance is
reasonable (Verbrugge, Megginson, & Owens, 1999). The 21 developing states in the value of 79 enterprises
have an average post-privatization financial performance ratio of three years and a pre-privatization operating
performance ratio of three years (Abid, 2003). Operating competency performance was evaluated at 33
Taiwanese banks. It employed the DEA approach to gauge competence, which is influenced by portfolio
investments, loan services, and interest and non-interest revenue. The financial ratio analysis was conducted
using the proportionate positioning of various types of input and output methodologies (Chen & Yeh, 1998).
Competency is the key concern of both the teachers and the bank executives in the banking industry. In order
to attain the peer group of competency levels, the research must examine the competency of financial

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 International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: www.ijfmr.com ● Email: [email protected]

institutions, identify the elements that affect the financial system's competency, and make recommendations
for how to do so (Hanif, 2002). A research looked at 68 Indian banks and examined the relationship between
strategic groups and corporate competency performance. Both the input from the banks and the output of
financial variables were employed (Mukherjee & Nath, 2002). Using the DEA approach, the research
investigated 48 Croatian commercial banks to determine their competency.
It made use of three inputs, including the number of employees, fixed assets, and software, as well as
deposits, and two outputs, including loans made and short-term securities (Jemric & Vujcic, 2002). The
empirical findings point to a highly competitive financial market for seasoned market players that can
advance performance and output while guiding organisational competency. These tests have occasionally
validated the impacts of financial institution liberalisation and deregulation on the competence and
effectiveness of the banking industry (Berger, Hunter, & Time, 1993). After the liberalisation of the 1970s
in the United States, it was often necessary for banks to be effective (Elyasiani & Mehdian, 1990).
Efficiencies in Turkey's banking system have reportedly declined after financial liberalisation. In
comparison to private and international banks, state-owned banks are superior (Denizer, 2000). Hardy and
Patti (2001) discovered some competence advancements in Pakistan. The role that financial markets play
in the development and evolution of the economy is hotly contested in economic research (Gertler, 1988;
Levine, 1997). Recent research (Levine & Zervos, 1998; Levine, Loayza, & Beck, 1999) has demonstrated
that monetary systems, which are crucial to economic advancement, respond better to the results of
empirical literature. The data was gathered in 92 states, and the findings indicated that, under the influence
of government ownership, the output of the monetary system grows with growth rate and economic growth
rate. Modern trade depends heavily on advanced banking, which is also necessary for financial
advancement (Rajan & Zingales, 1998). In this literature, Kunt and Maksimovic (1998) have produced
the majority of the most recent studies. The majority of this literature is presented in many publications
by Porta and Silanes (1999).

CONCLUSION
Although there is a sizable and expanding body of research demonstrating that privatisation may enhance
non-financial firms' performance, there is little proof about how it improves the performance of the
banking industry. This essay summarises the findings from the publications in the special bank
privatisation issue of the Journal of Banking and Finance. The study comes to the conclusion that while
bank privatisation typically increases bank efficiency, gains are greater when the government fully cedes
control, when banks are sold to strategic investors, when foreign banks are permitted to take part in the
privatisation process, and when the government does not impose restrictions on competition..In terms of
the economy, micro-level privatisation tends to boost productivity, quality of options, innovation, lower
costs & prices, and eventually improve company profits. These may also be, high incentives, lesser
political interference, healthy competition, and reinvestment.

REFERENCES
1. Abid, B. A. (2003). The financial and operating performance of newly privatized firms: Evidence from
developing countries. The Journal of Finance, 53(3), 1081-1110.
2. Beck, T., Cull, R., and Jerome, A. (2003). Bank Privatization in Nigeria, Working paper, World Bank
Group.

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 International Journal for Multidisciplinary Research (IJFMR)
E-ISSN: 2582-2160 ● Website: www.ijfmr.com ● Email: [email protected]

3. Berger, A. N., Hunter, W. C., & Timme, S. G. (1993). The efficiency of financial institutions: A review
and preview of research past, present and future. Journal of Banking & Finance, 17(2-3), 221-249
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