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Difference Between Public Sector & Private Sector Banks

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Posted on
Jul 25, 2022
Public & Private Sector Banks

Introduction

Have you visited a bank to deposit or withdraw money? Why do some banks have long queues in waiting and others use technology to serve their customers? Before answering all these questions, let’s understand a bank’s role first.

In simple terms, banks are financial organisations that accept money from depositors and lend money to borrowers. As a result, the bank earns the difference between the interest charged from borrowers and the interest paid to depositors. However, that’s not all. 

With globalisation on the rise, banking has become a diverse activity. New banks in the private sector have emerged, providing high-end services to their customers. While some prefer Govt banks for the safety and stability of funds, others prefer private banks for faster service. But, what is the difference between Public & Private Sector Banks? This blog covers the topic in detail.

What is a Public Sector Bank?

By definition, the banks in which the Govt of India holds more than 50% of the total stake are called Public Sector Banks. Due to this, these banks manage the schemes for the welfare of the general public launched by the government. Hence, these banks are also called Govt banks. They are the backbone of our economy. Since most of them were nationalised through various legislations, they are also called Nationalized Banks.

These banks were at the forefront when the Govt announced demonetisation & financial inclusion schemes. Even the farmer’s subsidy is provided to customers through these banks. However, the most significant strength of a Public Sector bank is its deep penetration into the rural & urban markets with well-structured operations. As of today, there are 12 Public Sector Banks in India.

Some famous examples of Public Sector Banks in India are the State Bank of India (SBI), Bank of Baroda (BOB), Canara Bank, etc.

What is a Private Sector Bank?

Banks in which the majority stake is held by individuals or a group of people are called Private Banks. The new Private banks emerged in India only after the Private Bank Rules 1993 were issued by the RBI. Before that, all Private Banks were nationalised in 1968 to safeguard people’s interests.

Post-liberalization, however, the Privatization & Globalization Policy allowed new Private Banks to emerge and grow significantly. These banks are known for prompt customer service and their deployment of new technologies to improve services. As of today, there are 21 Private Sector banks in India.

Some noteworthy examples of Private Sector Banks in India are HDFC Bank, ICICI Bank, Axis Bank, Federal Bank, IDBI Bank, IDFC First Bank, etc.

Difference Between Public Sector Banks & Private Sector Banks

Having learned about the banking system and what Public & Private Banks are, let’s understand the difference between Public & Private Sector Banks.

Points of DifferencePublic Sector BanksPrivate Sector Banks

Biggest Shareholder
The biggest shareholder (>50%) in a Public Sector Bank is the Government of IndiaThe biggest shareholder (>50%)  in a Private Sector Bank is an individual or a group of individuals

Incorporation
A Public Sector Bank is incorporated through unique Acts like the State Bank of India Act, 1955 or the Nationalization of Banks ActA Private Sector Bank is incorporated under the Companies Act, 2013 by any individual or group of individuals

Who Regulates?
The Reserve Bank of India regulates all Public Sector Banks. It issues directions, guidelines, and the rules to be followed by the Govt BanksThe Reserve Bank of India also regulates the Private Sector Banks. Although, in addition to the RBI guidelines, Private Banks have to follow the rules and regulations of the Companies Act, 2013.

Foreign Direct Investment (FDI)
The total FDI allowed for Public Sector Banks is only 20% because the Govt wants the maximum stake in these banksPrivate Sector Banks are permitted to take FDI up to 74% on the condition that there should be no change in management. However, the maximum stake that a foreign individual or organisation can hold is limited to 10%

Selection of the Top Management
As per RBI Guidelines, Public Sector Banks cannot choose directors independently. The Banks Board Bureau (BBB) provides recommendations to the PSBs to appoint full-time and Non-executive DirectorsAs long as they follow the RBI guidelines, Private sector banks can choose the directors on their own, just like any other company

Adoption of New Technology
The Public Sector Banks serve more people, and their priority is to keep the depositor’s money safe. As a result, they are slow in adopting new technology unless they are sure of its safety and securityPrivate Sector Banks are known to be technology savvy, i.e., they use the latest technologies to serve their customers better. Hence, they have been called the torchbearers of the technological changes in the Indian Banking Sector

Market Penetration
Public Sector Banks are the banks of the masses. Some of the PSBs like SBI serve more than 45 crore customers. Hence. They have high market penetration with branches and ATMs in the remotest locations possiblePrivate banks do not focus more on market penetration. Instead, they try to provide quality service to high-end customers

Loan Compliances
The speed of disbursing loans is lower with Public Sector Banks as they have to adhere to more compliances and tedious paperworkThe Private Banks disburse loans very quickly as they use new technology to reduce the turnaround time

Conclusion

Both Private Sector Banks & Public Sector Banks are an integral part of the Indian economy. While Private banks provide high-end services to their customers and are owned by individuals or groups of people, Public Banks penetrate deeper into the markets and serve more people. In public sector banks, the Govt is the majority shareholder and this is the fundamental difference between Private Sector Banks and Public Sector Banks.

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