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The massive Rs.13,000 crore scam involving fraudulent letters of undertaking (LOUs) issued by Punjab National Bank (PNB), India’s second-largest public sector bank (PSB), has reopened the debate on the privatisation of India’s state-owned banks. The discovery of the fraud has caused further turmoil in the banking system which, over the last few years, has been under tremendous pressure from substantial non-performing assets (NPAs). In January 2018, an Assocham-Crisil study estimated that the Indian banking sector would have gross NPAs amounting to an astounding Rs. 9.5 lakh crores by March 2018, up from Rs. 8 lakh crores a year ago.

Experts are divided in their opinion regarding the privatisation of Indian PSBs. Rajnish Kumar, chairman of State Bank of India (SBI), India’s largest bank, mentioned that the current timing was not right for privatisation of PSBs. He explained that banks needed to be strengthened and made financially attractive before divesting them, a process which he expected would take at least two years. Although Kumar was not against privatisation of some banks, he indicated that the banking system’s social initiatives would suffer if many state-owned banks were privatised since SBI could not single-handedly meet the goals of social inclusiveness set by the government.

Indian-American economist Arvind Panagriya, who served as vice chairman of the NITI Aayog between January 2015 and August 2017, stated that although a series of reforms initiated by the Reserve Bank of India (RBI) and the government in 2016 and 2017 had improved the banking system’s health, they were not sufficient. Additional structural reforms were needed in the longer term to ensure a comprehensive transformation of the banking sector. According to Panagriya, one of the reforms which would have to be prioritised by the next government was privatisation of all PSBs except SBI.