Pros and Cons of Privatization of Banks

What is a Bank

The word ‘Bank’ does not need any kind of introduction. Everyone, now a day, is familiar to what Bank is. It is a financial institution that works according to the structure of the economy and helps to promote it. Banks have proved to be very helpful in connecting the people directly to the economy of the nation. Banks are mainly authorized to receive the deposits of the people and also provide them loans easily and according to their need. Banks are the key to drive the economy smoothly and efficiently.

Short History of Banks in India

The Bank of Hindostan”, established in 1770, was the first Bank of India which ran for about 60 years and soon failed. The modern day “State Bank of India” was established in 1806 and was first named “Bank of Calcutta”. It was later renamed as the “Bank of Bengal” by the British Government. Soon this bank merged with “Bank of Madras” and “Bank of Bombay” and formed a new bank called “Imperial Bank of India”.

Reserve Bank of India (RBI)” which is the central banking institution in India, was established on 1st April 1935 with the RBI act 1934. In succeeding years, India got many other private banks working well with the economy. The Government of India took a step to nationalize the 14 major banks of India in 1964 after independence. After the 6 years, 6 more banks were nationalized in 1970 and thus we got 20 nationalized banks in India but soon “The New Bank of India” merged with the “Punjab National Bank” and now we have all over 19 nationalized banks in India.

Functions of Banks

The basic functions of all the banks are to deposit the savings of the customers through opening their Bank accounts and also providing them loans. These are the functions that every bank in India works on. Apart from these two basic operations, the modern day Banks also work on many other financial activities. The functions of a bank are as follows:

  1. Deposit Savings
  2. Providing loans
  3. Insurance
  4. Mutual fund
  5. Providing lockers
  6. Conducting social welfare programs
  7. Transferring funds
  8. Collecting cheques

As it will not be wrong to say that The Banks absorb the excess capital from the economy stopping them from being circulated and use them in the right direction properly to increase the productivity and the growth of the nation.

Public Sector and Private Sector Banks

Before we further proceed, it is very important for us to understand what the key difference between a public sector bank and a private sector bank is.


A public sector bank is a bank in which the majority of its stake is held by the Government. In other words, we can say that a public sector bank is such a bank which has its majority of shares under the hand of the Government. The Public Sector Banks are classified into two groups as:

  1. Nationalized Banks
  2. State Bank and Associates

In the other hands, a private sector bank is a bank in which the majority of the shares of the bank are under the control of its share holders. There are currently 22 Private Sector Banks working in India.

Privatization of Public Sector Banks in India

The privatization of any institution is the process of transferring the ownership from the government to the private hands. As we all know that India has 19 Nationalized Banks which act under The Reserve Bank of India and Indian Government.

Pros of Privatization of Banks

Many Organisations in India conducted surveys and found that the privatization of the Banks will result quite positive outcomes. It led the Indian Government to think about the privatization of all the Banks. Let’s see why privatization of Indian Banks has become indispensable for the Government of India:

  1. It is found that the Private sector banks are more advanced than Public sector Banks and are also working more efficiently.
  2. The foreign investors prefer to invest in private sector banks rather than the public sector banks.
  3. The private sector banks are much strict against loans and frauds.
  4. Public Sector banks are usually less competitive than the private sector banks.
  5. Private sector banks are obedient and quite serious towards their work and responsibility which lacks in the most of the Public sector banks.
  6. The private sector banks follow the concept of lowest risk.
  7. Privatization will also help to reduce the burden of the Government of India.

Cons of Privatization of Banks

No doubt the private sector banks are very efficient but they also fail somewhere. Privatization of the banks leads to several undesirable situations. Some of these are:


  1. The privatized banks will focus on maximizing their benefit and it will put an adverse effect on the middle class and poor people of the society.
  2. Every organisation, whether government sector or private sector, has some issues within its structure. It is not necessary that a private sector bank will never go with any fraud.
  3. The people in present India mostly believe on Public Sector Banks and don’t prefer to deposit their savings in private sector Banks.
  4. The public sector banks usually work on social welfare while the motive of private sector banks is generation of profit.
  5. Many government schemes like “Jan-Dhan Yojna” and “Pension Yojna” worked well and also became successful only because they were applied in Public Sector Banks.
  6. Another disadvantage of privatization is the excess use of nepotism which will affect the banking services.

Impact of Privatization of Banks in India

Privatization of Banks will definitely have some positive and also some adverse effect directly on society and indirectly on economy.

Privatization of banks will be helpful in getting a better customer service. It will also affect the economy and helps in growth. It may be said that the privatization of Indian Banks will remove irregularity and bring punctuality and will led to accountability in the service. It is obviously seen that the private institutions provide incentives to the employees according to their work so Privatization of Banks will definitely increase the productivity of the employees.

One of the most adverse affect of privatization will be the widespread economic gap. It will support the rich people of the society leaving poor behind. This concept will make poor poorer. Also the Privatized banks will mainly focus on urban areas and it will slowly diminish in rural areas of the nation.


As we all know that the Banks are the backbone of the economy. The Indian Constitution says “Every economic activity in the nation should be centred at the welfare of the people” but, in my view, privatization will violate this concept because it is obvious that the Private Bank will be aimed at maximizing their own profit. Where there are some bad aspects of privatization of banks there are also some good aspects of it. We must examine on our own and decided whether Privatization of Banks should be supported or opposed.


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