Why some RBI economists feel PSBs are more cost-efficient than private banks
Economists from the Reserve Bank of India (RBI) believes public sector banks’ (PSBs’) labour cost efficiency remained higher than PVBs for most of the years except 2016 in the last decade. An analysis by these economists — Snehal S Herwadkar, Sonali Goel and Rishuka Bansal of the department of economic and policy research of RBI – shows that the PSBs can generate higher level of output by incurring lower cost on labour.
They say that effective use of banking BC model, coupled with implementation of other cost-efficient techniques may be the reasons behind the higher cost efficiency of PSBs.
These economists in an article titled Privatisation of Public Sector Banks: An Alternate Perspective have argued that PSBs when seen through the lens of their social and overall economic impact score over private sector banks.
They say when profit maximisation is the sole motive, efficiency of the PVBs has always surpassed that of their public sector counterparts. However, when the objective function is changed to include financial inclusion—like total branches, agricultural advances and PSL advances— PSBs prove to be more efficient than PVBs.
These economists try to break the myth that the staff in PSBs is inefficient.
The analysis
Cost efficiency is defined as, “efficiency that gives a measure of how close a bank´s cost is to what a best-practice bank´s cost would be for producing the same bundle of output under the same conditions.
Data on total deposits, gross loans and advances, total investments (SLR+ non SLR) and non-interest income were taken as outputs whereas total staff and fixed assets (net) were taken as inputs. Average staff cost (total staff cost/ total staff) and expenses on rent, taxes, lighting, insurance and other administrative costs per unit of fixed assets (other operating expenses/ net fixed asset) were taken as input prices for the analysis. The number of banks in the study varied between 49 in 2010 and 33 in 2022.
The results of the analysis is show in the picture below:
The economists argues that privatisation is not a panacea for all ills, and they went on to say that public sector banks are not entirely guided by the profit maximization goal alone and have integrated the desirable financial inclusion goals in their objective function unlike PVBs. They also point out the countercyclical role of PSB lending. In the recent years, these banks have also gained greater market confidence, and despite the criticism of weak balance sheets, data suggests that they weathered the Covid-19 pandemic shock remarkably well.
