PRIVATISATION IN BANKS BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V 2012-13 SUBMITTED BY TANIMA M. BANSAL SEAT No.

JAI HIND COLLEGE A ROAD, CHURCHGATE, MUMBAI - 400 020.

PRIVATISATION IN BANKS
BACHELOR OF COMMERCE BANKING & INSURANCE SEMESTER V 2012-13 SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF BACHELOR OF COMMERCE BANKING & INSURANCE

BY TANIMA M. BANSAL SEAT No. JAI HIND COLLEGE A ROAD, CHURCHGATE, MUMBAI-400 020.

DECLARATION I, TANIMA M. BANSAL, student of B. Com. Banking & Insurance Semester V (2012-13) hereby declare that I have completed the Project on PRIVATISATION IN BANKS

The information submitted is true & original to the best of my knowledge.

Signature TANIMA M. BANSAL SEAT NO.

CERTIFICATE
This is to certify that Ms. TANIMA M. BANSAL of B.Com. Banking & Insurance Semester V (2012-13) has successfully completed the project on PRIVATISATION IN BANKS under the guidance of Professor (Name of guide)

Course Co-ordinator

Principal

Internal Examiner

External Examiner

College Seal

ACNOWELDGEMENT

A person always requires guidance and help of others to achieve success in his set objectives. Similarly, it was not possible for me to complete my assignment. I am indeed very much thankful to all the people who have helped me to complete the project.

I am gratefully indebted to Prof. Adarsh Suri, my project guide for providing me all the necessary help and required guidelines for the completion of my project and also for the valuable time that she gave me from her schedule.

Last but not least I am thankful to all my friends, who have been a constant source of inspiration and information for me. I thank to almighty for showering his blessings

INDEX

SR.NO. PARTICULARS 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

11.

PAGE NO. 7 8 9 10-11 12 13-14 15-20 21-25 26-28 29 30-32 33-35 36-38 39-45 46-47 48-55 56 57
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SUMMARY OBJECTIVES METHODLOGY INTRODUCTION

MEANING NEED FOR PRIVATISATION HOW IMPORTANT IS PRIVATISATION? BENEFITS OF PRIVATISATION POINTS IN FAVOR OF PRIVATIZATION DISADVANTAGES OF PRIVATIZATION POINTS IN FAVOR OF ANTI-

PRIVATIZATION

12. 13.
14. 15. 16. 17. 18.

METHODS OF PRIVATIZATION PREPARING FOR PRIVATIZATION PRIVATIZATION PROCESS TYPES OF PRIVATIZATION CASE STUDY OF A PRIVATE BANK CONCLUSION BIBLIOGRAPHY

SUMMARY
The aim of this project is to introduce the reader to the topic of PRIVATISATION IN BANKS. The results of these studies show that privatization usually results in increased productivity but also leads to a reduction or no change in employment. There is also strong evidence that privatization to foreign investors results in higher productivity gains. Privatization brings higher benefits to the firms wherever the appropriate institutions are in place. One should emphasize that tens of studies on developed, developing and transition countries using very diverse methodologies seem to yield very similar results. Consistent with the critique of market socialism above, the evidence show that performance contracts, corporatization, and hard budget constraints do not work without Privatization. It also shows that privatization is complementary to the institutional reforms that introduce rule-of- law, hard budget constraints, and investor protection. If these institutions are not developed, privatizations impact on the economic performance is actually negative.

HYPOTHESIS
Importance of Privatisation in banks and its contribution in growth of Public and Private sector
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OBJECTIVES
The objectives of the privatization and commercialization programme are: 1) To restructure and rationalize the public sector in order to lessen the dominance of unproductive investments in that sector; 2) To encourage share ownership by Indians in productive investment hitherto owned wholly or partially by the Government, and in the process to broaden the India Capital Market; 3) To create a favorable investment climate for both local and foreign investors; To provide institutional arrangements and operational guidelines that will ensure that the gains of privatization and commercialization are sustained in the future.

METHODLOGY

The methodology includes the information of the features of the Ombudsman in the form of primary data that had been received from the Branch Managers of the banks and the officers of the RBI. It also includes the informations from the related books & the related websites.

INTRODUCTION
A long history of privatization dates from Ancient Greece, when governments contracted out almost everything to the private sector. In the Roman Republic private individuals and companies performed the majority of services including tax collection (tax farming), army supplies (military contractors), religious sacrifices and construction. However, the Roman Empire also created state-owned enterprisesfor example, much of the grain was eventually produced on estates owned by the Emperor. Some scholars suggest that the cost of bureaucracy was one of the reasons for the fall of the Roman Empire. Perhaps one of the first ideological movements towards privatization came during China's golden age of the Han dynasty. Taoism came into prominence for the first time at a state level, and it advocated the laissez-faire principle of Wu wei, literally meaning "do nothing. The rulers were counseled by the Taoist clergy that a strong ruler was virtually invisible. During the Renaissance, most of Europe was still by and large following the feudal economic model. By contrast, the Ming dynasty in China began once more to practice privatization, especially with regards to their manufacturing industries. This was a reversal of the earlier Song dynasty policies, which had themselves overturned earlier policies in favor of more rigorous state control. In Britain, the privatization of common lands is referred to as enclosure (in Scotland as the Lowland Clearances and the Highland Clearances). Significant privatizations of this nature occurred from 1760 to 1820, coincident with the industrial revolution in that country. In more recent times, Winston Churchill's government privatized the British steel industry in the 1950s, and West Germany's government embarked on large-scale privatization, including selling its majority stake in Volkswagen to small investors
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in a public share offering in 1961. In the 1970s Pinochet General implemented a significant privatization program in Chile. However, it was in the 1980s under the leaderships of Margaret Thatcher in the UK and Ronald Reagan in the USA, that privatization gained worldwide momentum. In the UK this culminated in the 1993 Rail under Thatcher's successor, John Major; British Rail having been formed by prior nationalization of private rail companies. Significant privatization of state owned enterprises in Eastern and Central Europe and the former Soviet Union was undertaken in the 1990s with assistanced from the World Bank, the U.S. Agency for International Development, the German Treuhand, and other governmental and nongovernmental organizations. A major ongoing privatization, that of Japan Post, involves the Japanese post service and the largest bank in the world. This privatization, spearheaded by Junichiro Koizumi, started in 2007 following generations of debate. The privatization process is expected to last until 2017.

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MEANING

Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector (the state or government) to the private sector (businesses that operate for a private profit) or to private non-profit organizations. In a broader sense, privatization refers to transfer of any government function to the private sector - including governmental functions like revenue collection and law enforcement. The term "privatization" also has been used to describe two unrelated transactions. The first is a buyout, by the majority owner, of all shares of a public corporation or holding company's stock, privatizing a publicly traded stock, and often described as private equity. The second is a demutualization of a mutual organization or cooperative to form a joint stock company. Privatization generally improves the output and efficiency of the organizations that are privatized.

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NEED FOR PRIVATISATION

The major objective of privatization is to improve economic efficiency, competitiveness and sustainability of the whole private sector of an economy. The World Bank has noted that the return on equity invested in public sector enterprises is around one third that in the private sector. Thus, mobilizing capital for investment will modernize the private sector and free up resources by reducing the financial burden of loss-making public sector enterprises to more socially beneficial projects Important, too, is the removal of enterprises from the political arena. Privatization helps to raise revenues for the government. Private ownership strengthens the incentives for profit maximization and therefore should lead to increased productive and allocative efficiency. Yet private ownership may involve substantial costs: there can be market failures related to externalities, market power, and public goods. These market failures provide a rationale for public ownership. The argument that privatization helps to raise cash for the government is related to the privatizations impact on productivity. If the public ownership is optimal, then government is better off keeping the firms in public ownership and receiving the stream of profits. If the government is cash-strapped it should issue debt (or raise taxes). The Privatization proceeds are high only when the new private owners are more efficient (or at least expect to be more efficient). Therefore the fiscal benefits of privatization are certainly related to the efficiency and welfare advantages of private ownership. Yet, the fiscal issues are very important as they provide

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government with incentives to undertake the privatizationto raise cash and to eliminate public subsidies. Yet another argument in favor of private ownership is the importance of innovation. Shleifer 1998 argues that innovation can only prosper under private ownership. While inventors can come up with great ideas independently of the predominant ownership forms, further development and commercialization of innovative ideas is certainly more likely under private ownership.

The need for privatization arises out of the situations like: (1) Control of budgetary deficit (2) Resource mobilization (3) Reduction of extra tax burden (4) Flow of funds to public (5) Production increase (6) Retrieval of civil servants from public enterprises to better utilisation in governance and administration. (7) Increase in competition, both in domestic as well as international markets.

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HOW IMPORTANT IS PRIVATISATION??

Since 1979, many countries have embarked on the course of privatization which has changed the economic landscape around the world. Privatization has spread to many industries, Including those that had never been privately owned. Privatization has transformed command economies in post-communist countries into decentralized ones. It has changed the political balance of power in many societies and revolutionized global financial markets. Yet, the intellectual debate on the benefits of privatization is far from over. The available research shows that the impact of privatization on the privatized firms and on the economy and society depends on many variables including political and economic institutions. There are significant complementarities between privatization and other reforms. It also matters how privatization is structured and who the new owners are. In particular, there are substantial benefits to opening up to foreign owners are. In particular, there are substantial benefits to opening up to foreign ownership.

How important is privatization in India? The first order issue is that of competition policy. When the government hinders competition by blocking entry or FDI, this is deeply damaging. Once competitive conditions are ensured, there are, indeed, benefits from shifting labour and capital to more efficient hands through privatization, but this is a second order issue.

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The difficulties of governments that run businesses are well-known. PSUs face little "market discipline". There is neither a fear of bankruptcy, nor are there incentives for efficiency and growth. The government is unable to obtain efficiency in utilizing labour and capital; hence the GDP of the country is lowered to the extent that PSUs control labour and capital. When an industry has large PSUs, which are able to sell at low prices because capital is free or because losses are reimbursed by periodic bailouts, investment in that entire industry is contaminated. This was the experience of Japan, where the "zombie firms" - loss-making firms that were artificially rescued by the government - contaminated investment in their industries by charging low prices and forcing down the profit rate of the entire industry. Further, in many areas, the government faces conflicts of interest between a regulatory function and an ownership function. As an example, the Ministry of Petroleum crafts policies which cater for the needs of government as owner, which often diverge from what is best for India. There is a fundamental loss of credibility when a government regulator faces PSUs in its sector: there is mistrust in the minds of private investors, who demand very high rates of return on equity in return for bearing regulatory risk. These arguments have led many economists to advocate large-scale privatization, so as to clear the slate, and get on with the task of building a mature market economy. The role model in this regard is Germany. After the collapse of communism and the unification of East and West Germany, an auction was held for selling off all East German PSUs. Negative bids were permitted; i.e. the government was willing to even pay a private manager to take over a loss-making business if no higher bid was to be
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found. Through this, Germany was able to erase erase the heritage of socialism, and get on with the task of running an efficient market economy. While such a game plan is entirely feasible in India, the present Parliament desires no privatization. Does this mean that in the immediate future, progress in economic policy on privatization must merely wait for the next elections? When we look at various industries in India, the gains from privatization are quite heterogeneous. In some cases, there are hopelessly loss-making PSUs. These operate in industries where private and foreign firms have been able to come in, and the PSU has been left far behind the standards of quality and price set by the private sector. The PSUs should ideally have been sold off long ago, but today, these firms are irrelevant for the competitive dynamics of the industries that they operate in. The only issue is that of getting the land, the labour and some machinery out of public hands. When privatization is achieved, India will benefit because the private buyer will produce more GDP using the same resources, and the flow of budgetary support to these firms will cease. The government should be happy to get these firms out of its hands with negative bids. The next and most interesting category comprises industries like telecom and airlines. In these areas, India has witnessed the dramatic benefits that come from the entry of private players. Telecom and airline services in India are now dramatically improved, if not yet up to world-class, by changing rules in a way that permitted limited entry to domestic and foreign players. The privatization of VSNL was critically important because it was part of the opening up of the ILD sector to competition: the government would
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arguably have been more tardy in opening up if it had a vested interest through ownership of VSNL. However, the key innovation, which broke with the stasis of socialism was opening up entry barriers - not privatization. In both sectors, the full benefits from permitting foreign competitors, which are only present in very muted fashion, remain to be harnessed. While Spice jet is a good airline, there are bigger benefits waiting to be obtained by having domestic flights run by Lufthansa and Singapore Airlines. In both sectors, the defining issue in policy is the removal of entry barriers, not privatization. Looking forward, there is a good chance that in some years, BSNL, MTNL and the merged airline will end up like one of the many defunct PSUs of today. It makes sense for the government to sell today - while the going is good. But the privatization of these three firms is no longer the most important issue - the further elimination of entry barriers faced by domestic and foreign firms is. What does this tell us about banking? The decline in market shares of PSU banks, while helped along by strikes of PSU bank unions, has proceeded only slowly. This is partly because there is a fundamentally non-level playing field where private and foreign banks have deposit insurance for only Rs 100,000 of deposits while PSU banks have unlimited deposit insurance. This gives one reason in favour of bank privatization: it is inherently difficult to achieve competitive conditions without privatization. But equally, there is no industry in India where the license-permit raj hinders entry more than in the case of banking. At a time when the Indian economy is booming, and every kind of business is being created, the one industry where we see no new

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firms starting up is banking. This has surely got to do with government restrictions on entry. There is absolutely no industry in India where the opening of branch offices by foreign firms and private firms requires permission from the government. When Ford operates in India, it has to obey rules on FDI, but after that, it never has to go back to the government to take permission to open offices. What is worse, all foreign banks - put together - are given permission to open 12 branches per year in the full country. There is no worse instance where contemporary Indian policy-making is animated by ideas from the 1960s. Privatization is important due to the following reasons: -

1. Improvement in efficiency: -The motive of private enterprises is to maximize profits. Therefore, they have to improve efficiency and performance without the competitive forces.

2. Raising Funds: -By selling government equity to private sector it is possible to raise funds for public investment.

3. No political influence: - Once a public sector is privatized it becomes free from political, ministerial and government intervention.

4. Quick Decisions: - In private sector organization quick decisions can be taken to respond to changing circumstances.

5. Better Service to the customers: -The survival and growth of private sector
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enterprises depends on consumer satisfaction. Therefore they try to provide better quality goods and services to their customers.

6. Quick remedial measures: -In private sector enterprises quick remedial measures must be taken to avoid wastages, losses and to secure benefits from business opportunities. There is no scope for red tapism.

7. Easy to fix responsibility: -In private sector organization authorities, responsibilities and accountability are generally fixed by the Board of Directors and corporate laws. Therefore, it is easy to fix the responsibility in the case of failure in performance by any employee.

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Benefits of Privatization
Many reasons explain the movement by cities and states toward privatization to restructure and "right size" government. Much of the impetus is the desire to inject competition into the delivery of state services in order to provide services to citizens in a more-efficient and cost-effective manner. If structured appropriately and sufficiently monitored, privatization can: 1. SAVE TAXPAYERS' MONEY 2. INCREASE FLEXIBILITY 3. IMPROVE SERVICE QUALITY 4. INCREASE EFFICIENCY AND INNOVATION 5. ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW 6. STREAMLINE AND DOWNSIZE GOVERNMENT 7. IMPROVE MAINTENANCE SAVE TAXPAYERS' MONEY By applying a variety of privatization techniques to state services, infrastructure, facilities, enterprises, and land, comprehensive state privatization programs can reduce program costs. Over 100 studies have documented cost savings from contracting out services to the private sector. Cost savings vary but average between 20 and 40 percent, depending on the service. For some services, such as prison construction and
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operation, savings are generally less, while for others, such as asphalt resurfacing, savings are often greater. Competitive bidding whenever possible and careful government oversight are crucial to sustained cost savings. States can also realize large one-time windfalls from the sale or lease of state infrastructure and facilities. Moreover, privatization can put an end to subsidies to previously government-run operations. Privatization also creates a steady stream of new tax revenues from private contractors and corporations who pay taxes and license fees, while state units do not. INCREASE FLEXIBILITY Privatization gives state officials greater flexibility to meet program needs. Officials can replace the private firm if it isn't meeting contract standards, cut back on service, add to service during peak periods, or downsize as needed. IMPROVE SERVICE QUALITY A number of surveys have indicated that public officials believed service quality was better after privatization. In a survey of 89 municipalities conducted in 1980, for example, 63 percent of public officials responding reported better services as a result of contracting out. If competitive bidding is instituted for a service, service quality can improve even if the service is retained in-house. The reason is simple: competition induces inhouse and private service providers to provide quality services in order to keep complaints down and keep the contract.

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Service quality is not assured, however, by privatization. Contracts must be welldesigned with performance standards that create incentives for high quality service. Furthermore, diligent monitoring of the contractor's performance through customer surveys and on-site inspections must also be performed by government in its oversight role. INCREASE EFFICIENCY AND INNOVATION Private management can significantly lower operating costs through the use of more flexible personnel practices, job categories, streamlined operating procedures, and simplified procurement. Private ownership can stimulate innovation. Competition forces private firms to develop innovative, efficient methods for providing goods and services in order to keep costs down and keep contracts. These incentives, for the most part, do not exist in the public sector. ALLOW POLICYMAKERS TO STEER, RATHER THAN ROW Privatization allows state officials to spend less time managing personnel and maintaining equipment, thus allowing more time to see that essential services are efficiently delivered. STREAMLINE AND DOWNSIZE GOVERNMENT Privatization is one tool to make bureaucracies smaller and more manageable. Large private corporations often sell off assets that are underperforming or proving too difficult to manage efficiently. Under new owners and leaner management, such divisions often receive a new lease on life. Entrepreneurial governments can replicate this experience.
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IMPROVED MAINTENANCE Private owners are strongly motivated to keep up maintenance in order to preserve the asset value of the investment in the facility. Public owners often defer maintenance due to political considerations, increasing overall long-term costs. To some extent, each privatization has to be judged on its own merits. Each business and its market was different, and the precise arrangements for privatization were different from one example to another; there was no standard pattern. However, some general comments can be made. 1. Privatizations meant huge sums of money going into the government. This improved the governments budgetary position and allowed taxes to be cut. 2. Government lost responsibility for large areas of UK business and employment, and therefore lost the political need to interfere and spend money on sorting out other peoples problems. 3. The businesses became much more efficient. Prices fell, and quality of service to customers rose. One cost of this was massive, if overdue, job losses so unemployment rose in the short term. 4. Share ownership widened as many people used privatization to buy shares for the first time in their lives. However, 20 years later many of these shares have been sold, and the permanent effect on wider share ownership has been modest. 5. These businesses became free to borrow and to invest. 6. They became free to innovate and enter new markets.

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7. They became free to expand, to merge, to take over and be taken over. As a result of these factors, the face of the relevant markets has changed quite substantially. 8. Basic advantage in privatization is accurateness and commitment towards the service as they private organizations are very much concerned about the profits they make ultimately which depend on the quality of service being provided by them and the public response to it. 9. Privatization generates more revenue compared to government enterprises, thus govt can indirectly earn a bit more by leasing out enterprises to private organizations. 10. Customer support and satisfaction basically is of much interest in private enterprises comparatively.

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Points In Favor of Privatization

1) Performance:
State-run industries tend to be bureaucratic. A political government may only be motivated to improve a function when its poor performance becomes politically sensitive, and such an improvement can be reversed easily by another regime. 2) Increased efficiency: Private companies and firms have a greater incentive to produce more goods and services for the sake of reaching a customer base and hence increasing profits. State-owned firm would not be as productive due to the lack of financing allocated by the enti re governme n t 's budget that must cons iderot he r ar eas of the e conomy. 3) Specialization: A private business has the ability to focus all relevant human and financial resources onto

specific functions. A state-owned firm does not have the necessary resources to specialize its goods and services as a result of the general products provided to the greatest number of people in the population. 4) Improvements: Conversely government may put off improvements due to political sensitivity and special interests even in cases of companies that are run well and better serve their customers' needs. 5) Accountability: Managers of privately owned companies are accountable to their owners/s har eh olde r s and to the consumer, and can onlyexist and thrive where needs are met. Managers of publicly owned companies
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are required to be more accountable to the broader community and to political "stakeholders". This can reduce their ability to directly and specifically serve the needs of their customers, and can bias investment decisions away from otherwise profitable areas. 6) Civil-liberty concerns: A company controlled by the state may have access to information or assets which may be used against dissidents or any individuals who disagree with their policies. 7) Goals: A political government tends to run an industry or company for political goals ratherthan economic ones. 8) Capital: Privately held companies can sometimes more easily raise investment capital in the financial markets when such local markets exist and are suitably liquid. While interest rates for private companies are often higher than for government debt, this can serve as a useful constraint to promote efficient investments by private companies, instead of cross-subsidizing them with the overall credit-risk of the country. Investment decisions are then governed by market interest rates. State-own ed industries have tocompete with de man ds from oth e r gove rn me nt departments and special interests. In either case, for smaller markets, political risk may add substantially to the cost of capital. 9) Natural monopolies: The existence of natural monopolies does not mean that these sectors must be state owned. Governments can enact or are armed with anti-trust legislation and bod ies to deal with anticompetitive behavior of all companies public or private.

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10) Concentration of wealth: Ownership of and profits from successful enterprises tend to be dispersed and diversified particularly in voucher privatization. The availability of more investment vehicles stimulates capital markets and promotes liquidity and job creation. 11) Job gains: As the economy becomes more efficient, more profits are obtained and no government subsidies and less taxes are needed, there will be more private money available for investments and consumption and more profitable and better-paid jobs will be created than in the case of a more regulated economy.

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Disadvantages of Privatization
1. Privatization is expensive and generates a lot of income in fees for specialist advisers such as banks. 2. Public monopolies have been turned into private monopolies with too little competition, so consumers have not benefited as much as had been hoped. This is the main reason why it has been necessary to create regulators (OFWAT, OFGAS etc). This is an important point. It partly depends on how the privatization took place. For example, the railways were privatized in bit of a rush and there might have been other ways to do it so that more competition was created. It partly depends on the market. Some markets are natural monopolies where competition is difficult. For example, it would be very wasteful and expensive to build two sets of track into Liverpool Street just to create some competition. Natural monopolies create a special justification for public ownership in the general public interest. 3. The nationalized industries were sold off too quickly and too cheaply. With patience a better price could have been had with more beneficial results on the governments revenue. In almost all cases the share prices rose sharply as soon as dealing began after privatization. 4. The privatized businesses have sold off or closed down unprofitable parts of the business (as businesses normally do) and so services eg transport in rural areas have got worse. 5. Wider share ownership did not really happen as many small investors took their profits and didnt buy anything else.

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Points In Favor of Anti-Privatization

1) Performance: A democratically elected government is accountable to the people through legislature, Congress or Parliament, and is motivated to safeguarding the assets of the nation. The profit motive may be subordinated to social objectives. 2) Improvements: The government is motivated to performance improvements as well run businesses contribute to the State's revenues. 3) Accountability: The public does not have any control or oversight of private companies.

4) Civil-liberty concerns: A democratically elected government is accountable to the people through a parliament, and can intervene when civil liberties are threatened. 5) Goals: The government may seek to use state companies as instruments to further social goals for the benefit of the nation as a whole. 6) Capital: Governments can raise money in the financial markets most cheaply to re-lend to state-owned enterprises.
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7) Lack of market discipline: Governments have chosen to keep certain companies/industries under public ownership because of their strategic importance or sensitive nature. 8) Cuts in essential services: If a government-owned company providing an essential service (such as the water supply) to all citizens is privatized, its new owner(s) could lead to the abandoning of the social obligation to those who are less able to pay, or to regions where this service is unprofitable. 9) Natural monopolies: Privatizations will not result in true competition if a natural monopoly exists. 10) Concentration of wealth: Profits from successful enterprises end up in private, often foreign, hands instead of being available for the common good. 11) Political influence: Governments may more easily exert pressure on state-owned firms to help implementing government policy. 12) Downsizing: Private companies often face a conflict between profitability and service levels, and

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Could over-react to short-term events. A state-owned company might have a longer-term view, and thus be less likely to cut back on maintenance or staff costs, training etc, to stem short term losses. Many private companies have downsized while making record profits.

13) Profit: Private companies do not have any goal other than to maximize profits. A private company will serve the needs of those who are most willing (and able) to pay, as opposed to the needs of the majority, and are thus anti-democratic. The more necessary a good is, the lower the price elasticity of demand, as people will attempt o buy it no matter the price. In the case of price elasticity of demand is zero demand part of supply and demand theories does not work. 14) Privatization and Poverty: It is acknowledged by many studies that there are winners and losers with privat ization. The number of losers which may adduptothe size and severityofpoverty can be unexpectedly large if the method and process of privatization and how it is implemented are seriously flawed (e.g. lack of transparency leading to state-owned assets being appropriated at minuscule amounts by those with political connections, absence of regulatory institutions leading to transfer of monopoly rents from public to private sector, improper design and inadequate control of the privatization process leading to asset stripping. 15) Job Loss: Due to the additional financial burden placed on privatized companies to succeed without any government help, unlike the public companies, jobs could be lost to keep more moneyin the company.

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Methods of Privatization

The literature provides several taxonomies of privatization methods, but almost all bank privatizations can be categorized as share sales, asset sales or voucher privatizations. The vast majority of bank privatizations take some form of share sale, with a phased privatization often involving first an IPO or private placement, followed by subsequent secondary offerings.Privatization is a process, not an event, so while it is common to categorize by type of transaction, there are many decisions that lead to the final choice about how to divest governments ownership stake. These decisions are influenced by policy objectives and political and fiscal constraints. Almost all successful bank privatizations have been some form of share sale. Attracting a reputable financial institution as a strategic investor, often with a significant public share float, has generally proven more successful than privatizations resulting in widely-held ownership. Government retention of a majority shareholding for an extended period has often been unsuccessful, thwarting true reform and leading to a need for additional recapitalization. There is empirical evidence that foreign bank entry improves the function of national banking markets, so attracting a foreign bank as strategic investor may be particularly desirable. By far the most common type of bank privatization involves the sale of shares, which can be either a public offering, or a tender or auction process. Virtually all cases included in are some form of share sale. The choice of share sale method is typically influenced by a range of sometimes conflicting objectives.

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A widely-subscribed IPO can be politically attractive as a means of preserving domestic ownership, avoiding the pitfalls of lending to parties connected to significant owners of the bank, and may also serve to foster capital market development by providing a large listing for the local stock exchange. Widely-held ownership has the drawback of not providing strong oversight of management by a significant shareholder, and also does not provide the natural conduit to strengthen management and the banks internal systems that would arise from sale of a controlling interest to a strong bank. Privatization by IPO can be disappointing in countries with small and emerging capital markets. Underdeveloped institutional structures, such as inexperienced investment banks, limited broker networks and trading mechanisms, have led to market manipulation at worst, or inefficient share distribution at best. Countries seeking to use bank privatizations as a catalyst for capital market development may be disappointed with the pricing of the IPO, and still have markets with limited depth and liquidity due to inadequate institutional structure and low investor interest. Government can privatize firms through three major approaches: share issue privatization (SIP), asset sales to a single buyer (trade sales), and non-cash (or voucher) privatization. The choice between SIP and the trade sales is usually driven by size. Smaller firms are sold via Private markets (usually auctions) to a single buyer. This resolves the issue of separation of ownership and control which especially severe in countries with poor corporate governance. Larger firms are harder to sell in their entirety, since the lack of financial intermediation is precludes buyers from raising sufficient funds to pay a high price for the asset (Maskin 2000). Such firms are usually privatized via public capital markets.

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In both SIPs and asset sales, an important decision is whether to allow foreigners to bid. For an economist, increasing competition among bidders (either via SIP or in trade sales) should raise privatization revenues and eventually attract a more efficient owner. However, foreign participation is often ruled out due to political/nationalistic sentiment. In many cases, the sentiment is promoted by the incumbent bidders, who benefit from the ban on foreign ownership at the expense of the domestic public. Indeed, the exclusion of the foreign bidders raises substantial problems, especially in the case of mass privatization. When a postsocialist government is about to privatize a large part of the economy, there is insufficient wealth within the country to assure a high price for the assets. Therefore one has to resort either to dispersed ownership, even for small firms, or to non-cash privatization. The latter may result in inefficient insider ownership and/or low privatization revenues, leading to disappointment with reforms.

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Preparing for Privatization

A crucial question is whether to restructure a state-owned bank prior to privatization, or to try to sell the government stake essentially on an as is basis. In the rare case of state-owned bank operating efficiently on a commercial basis, there is little need for operational or financial restructuring as part of the process of government divestment. However, in the more typical case, state-owned banks require significant restructuring to become fully competitive with privately-owned banks. The case for financial restructuring is often clear-cut as deeply insolvent stateowned banks are not very attractive to private sector owners. Since investors are unwilling to pay enough to fill the hole created by bad assets, government as owner has to find a way to provide the bank with a sufficient quantity of good quality assets to equal its liabilities in order to attract new equity investors. Methods of restructuring can vary. One frequently used model is the good bankbad bank split, with nonperforming loans left in the bad bank, and government providing the good bank with assets, usually bonds, to fill the balance sheet hole. A variation on this approach, which has been used in Ghana, Tanzania, and Uganda, among other countries, is to transfer the bad assets to a specialized asset management company (AMC) rather than leave them in the bad bank. When the volume of bad assets is smaller, or if the decision is made that the bank should work out the problem loans itself, government as shareholder may subscribe to new equity issues. A further variation, which is only available if the bank to be privatized is already on a reasonably sound financial footing, is to issue subordinated debt to bolster the capital base prior to privatization.

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While the need for financial restructuring is often clear-cut, the timing of such restructuring is not. When the state-owned bank is insolvent, delayed recapitalization can serve to increase losses and the ultimate cost. An insolvent bank can lack sufficient income from its earning assets to cover its costs, and without the new earning assets acquired through recapitalization, it may not be possible to return to profitability regardless of the amount of operational restructuring undertaken. However, when a bank has been recapitalized, failed operational restructuring and long privatization delays can lead to the need for further recapitalization expenses when the bank is finally ready for divestiture. For this reason, it is often recommended that recapitalization be closely linked to the privatization transaction. One attempt to balance the need for earning assets provided through recapitalization with the need to ensure effective restructuring is to provide recapitalization in stages, contingent on meeting restructuring objectives. Even when it is clear that operational restructuring is required, it may not be clear whether it is better for this to happen under government ownership, or if it is ultimately more cost effective to sell the bank on an as-is basis. The as is sale price may be higher than the sale price for a restructured bank net of ongoing operating losses and one-off charges for staff retrenchments, branch closings, and other restructuring costs. This is because restructuring costs may not be fully recovered in subsequent divestiture, as management or consultants retained to assist are unlikely to achieve the exact branch alignment and staffing that a new owner would prefer. While new owners may pay more not to have to deal with an operational restructuring plan already underway, there may also be situations where new owners are reluctant to take on the burden of staff reductions and

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branch closures. Particularly where strong political pressure is anticipated, new owners may require certain closures or lay-offs to occur prior to privatization.

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Privatization Process
The privatization process is aimed at selling government property in an open and transparent manner with a view to obtaining the best possible price. It varies somewhat depending on the nature of the asset being privatized, on the proportion of shares being offered for privatization, and on whether a transfer of management is involved. The Board of the PC decides what kind of process will be followed. Approval of Council of Common Interests is also obtained. Following are typical steps in the privatization process of a major unit:

Identification of an entity for privatization CCOP / Cabinet approval Approval of CCI Appointment of Financial Advisor (FA) for major transaction(s) with

approval of PC Board

Appointment of Valuator where FA is not hired Due diligence by FA / Valuator Privatization strategy Restructuring, sectoral / regulatory reforms if required Expressions of Interest (EOI) Screening - Statement of Qualification (SOQ) Pre-qualification Due diligence by potential bidder(s) Valuation approved by PC Board and CCOP Pre-bid conference(s) Bidding process approval by Board and CCOP Open bidding: media invited to observe Board and CCOP approve price and bidder
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Letter of Acceptance to successful bidder Management transfer (through execution of Share Purchase

Agreement / Asset Sale Agreement) after 100% receipt of payment A brief description of some of the steps common to major transactions is given below:

Identification: The first step is the identification of the entity or list of entities to be privatised. In a typical transaction the PC, in consultation with the relevant ministry, submits a Summary of the proposed transaction to its Board. The Summary justifies the need for privatizing the property, outlines the likely mode of privatisation, and sometimes seeks guidance on issues relating to such matters as pricing, restructuring, legal considerations, and the regulatory framework. Once endorsed by the Board, it is submitted to the Cabinet Committee on Privatisation for approval or Cabinet, if necessary.

Hiring of a Financial Advisor In major transactions, the process to hire a financial advisor is carried out by the transaction manager with the approval of the Board. Terms of reference for the FA are finalized, expressions of interest from prospective FAs are solicited and short listed firms are invited to submit technical and financial proposals in a common format. A Transaction Committee generally headed by a member of the PC Board is constituted (through submission of the transaction to the PC Board). The Transaction Manager prepares summary of the technical offers received from the potential FAs. The Transaction Committee scores the technical proposals and the highest ranked firm based on both technical and financial scores is invited for
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contract negotiations and signing. In November 2001, the Board approved regulations for hiring a financial advisor in order to make the procedures more transparent. An amendment was made in the PC regulations for hiring FAs in 2007. In other transactions a Valuator is hired according to the Hiring of Valuers, Regulations, 2001. This regulation was amended by PC in 2007.

Due Diligence: The next step is to carry out the legal, technical, financial and human resource due diligence for presentation to the bidders. This is aimed at identifying any legal encumbrances, evaluating the condition of the assets, and examining the accounts of the company in order to place a value on the company. For most industrial units and some small transactions, this is done using in-house transaction managers and staff, or by sub-contracting some part of the work to a domestic legal, technical, or chartered accounting firm. However, for major privatizations in banking, infrastructure, or utilities, the FA carries out this function. Following due diligence, the FA finalizes the privatization plan. This may include recommendations on any needed restructuring, in addition to specifying the amount of shares or assets to be privatized. For industrial sector privatizations it is customary to offer 90% shares and reserve 10% shares for the employees who do not opt for GHS/VSS. Shares not purchased by employees are offered to the successful bidder at the price of his offering. For major privatizations or when the proposed privatization mode is different from the initial plan, the plan is submitted to the Board, the CCOP, or the full Cabinet for approval.

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Enacting any Needed Regulatory and Sectoral Reforms For many major transactions, the ability to privatize and the amount of proceeds realizable depend critically on the level of regulated prices of inputs or outputs and sectoral or regulatory policies. For many monopolies or quasi-monopolies, the rules of the game specifying the competition framework post-privatization, the manner and type of regulation, and the institutions regulating them are key to investor interest. In addition to rules determining prices or tariffs, there may be rules determining standards, penalties for non-compliance, the extent, form and timing of any proposed deregulation, and the evolving structure of the market following liberalization. Clarification of these rules and passage of needed laws and regulations will often be necessary before taking the transaction to market.

Valuation of Property: In order to obtain an independent assessment of the value of the property being privatized, the Commission relies primarily on external firms. The Financial Advisor, where engaged, carries out the valuation to obtain a reference price for the property. In other cases, the Commission contracts with an external valuation firm or accounting firm as specified in the rules on the valuation of property, which can be obtained from the PC website. The methods used for the valuation vary with the type of business and often more than one method is used in determining the value. These include the discounted cash flow method, transaction multiple method, asset valuation at book or market value, and stock market valuation. Despite using scientific methods, valuation remains more an art than a science. The true value is dependent on many difficult variables such as country risk, corporate psychology and strategy, investor specific synergies and perceptions of future macroeconomic performance. Only the market can
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determine the true value. Therefore, it is important to focus on designing appropriate transaction structures, on advertising in relevant media, in choosing and implementing appropriate pre-qualification criteria for bidders, and in following an appropriate bidding process to obtain a fair price for privatization.

Pre-bid and Bid Process: Expressions of Interest (EOI) are invited by advertising in the relevant media. The PC Ordinance 2000 spells out some of the advertising procedures. Depending on the kind of transaction, the EOI describes the broad qualifications that potential bidders must possess. Those submitting an EOI are provided with Request for Statement of Qualification (RSOQ) document which is evaluated to determine whether an interested party meets the requisite qualifications on the basis of Statement of Qualification (SOQ) submitted by interested parties. The pre-qualified parties are then provided with the instructions to bidders, draft sale agreement, and other relevant documents.

Pre-qualified bidders are then given a specified period to conduct their own due diligence, following which they are invited to pre-bid meeting(s) where their questions and concerns can be addressed. The meetings are useful in determining the bidding procedure to be followed and could in some cases determine the proportion of shares that the Government may want to offload. The bidding itself is done openly, with all bidders and media invited.

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Post-bid Matters: Following bidding and identification of the highest bidder, the Board of the PC makes a recommendation to the CCOP as to whether or not to accept the bid. The reference price is a major determinant in the recommendation, although the Board may recommend the sale even if the offer price is below the reference price. However, bids received, which are lower by more than 10% of reference price, are not accepted. Once the bid price and bidder are approved, the PC issues a letter of acceptance (LOA) to the successful bidder, indicating the terms and conditions of the payment. Once sale proceeds have been collected, on the same day or immediately thereafter PC executes the share purchase agreement (SPA) or asset sale agreement (ASA) which results in transfer of the property to the successful bidder. Under PCs current policy, privatisation proceeds are generally required to be paid upfront rather than over time, however, transaction specific exceptions are possible as had been the case for many earlier transactions. Within 30 days of the sale, the PC is required to publish the summary details of the transaction in the official gazette.

General: In summary, the privatization process is lengthy for major transactions, mainly to ensure transparency in the process. After receiving CCOP approval for the privatization, it typically takes about 12 months to close a major transaction, even when no major restructuring of the company is required. This includes about three to four months to appoint a Financial Advisor and another five to six months for the FA to complete its legal, technical, financial and human resource due diligence and to propose a privatization strategy. Following approval of the strategy, the marketing and bidding process may take four to five months
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(valuation efforts proceed in parallel), while it may take another two months after bidding to obtain approvals, finalize sale documents, and close the transaction. Delays in privatization are often caused due to non-availability of clear land titles, absence of necessary regulatory framework and sectoral policies and any needed restructuring of the entity. In addition, resolution of transactional and interministerial issues often results in causing delays in the bidding process.

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Types of Privatization

There are three main methods of privatization: Share Issue Privatization (SIP):

Selling shares on the stock market. Share issue privatization is the most common type of privatisation.Share issues can broaden and deepen domestic capital markets, boosting liquidity and potentially economic growth, but if the capital markets are insufficiently developed it may be difficult to find enough buyers, and transaction costs (e.g.underpricing required) may be higher. For this reason, many governments elect for listings in the more developed and liquid markets, for example Euro next, and the London, NewYork and Hong Kong stockexchanges.

Asset Sale Privatization:

Selling the entire firm or part of it to a strategic investor, usually by auction. As a result of higher political and currency risk deterring foreign investors, asset sales are more common in developing countries. A substantial benefit of asset sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues.

Voucher Privatization:

Shares of ownership are distributed to all citizens, usually for free or at a very low price.Startup of new private businesses in formerly socialist countries. As a result of higher political and currency risk deterring foreign investors, asset sales occur more commonly in developing countries.
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Privatization from below Voucher privatization has mainly occurred in the transition economies of Central and Eastern Europe, such as Russia, Poland, the Czech Republic, and Slovakia. Additionally, Privatization from below is/has been an important type of economic growth in transition economies. A substantial benefit of share or asset-sale privatizations is that bidders compete to offer the highest price, creating income for the state in addition to tax revenues. Voucher privatizations, on the other hand, could be a genuine transfer of assets to the general population, creating a real sense of participation and inclusion. If the transfer of vouchers is permitted, a market in vouchers could be created, with companies offering to pay money for them.

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Case Study Of A private Bank

ICICI BANK AND ITS PARTNERSHIP LINKAGES IN INDIA Introduction This case study describes the MFI linkage model of ICICI Bank, Indias second largest commercial bank. This Bank has developed a unique partnership model to deliver small loans to the rural poor. The case focuses on two examples of ICICI Banks microfinance facilitation links with microfinance intermediaries serving individuals and self-help groups (SHGs), one with BISWA, a Microfinance Institution (MFI) in Orissa and one with PSS, a smaller MFI working with selfhelp groups in the poorest parts of Warangal in Andhra Pradesh. The two cases were selected to demonstrate how a large commercial bank can use the strengths of local MFIs to link directly with large numbers of poor clients. Microfinance in India Indias well-developed financial sector consists of 27 government owned banks, more than 20 major private banks, of which ICICI Bank by far the largest, and over 100 000 cooperative banks; the financial sector is strictly regulated and supervised. Government legislation requires all banks in India to lend at least 40 percent of their credit (at an interest rate not more than 4 percentage points above their prime lending rate) to the so called priority sector which includes rural areas, small industries, exporting firms, housing and agriculture. This policy and the general welfare objectives of Indias public sector banks, the so-called new paradigm microfinance, came very late to India. The government spent many years trying to alleviate poverty with massive programmes of directed and subsidized credit. These programmes had limited success, were often hijacked
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by the less poor and used as a patronage mechanism by politicians and bureaucrats. They did however occupy the institutional space, which might otherwise have been filled by micro-finance. While these programmes helped some people, they also left long-term scars on the Countrys financial system. The cheap soft loans, often combined with subsidies, were distributed through the enormous network of over 150 000 bank branches, including rural co-operative banks. Recoveries were poor, often below 30 percent, and default was further encouraged by local and even national loan waivers. In the late 1980s the Mysore rehabilitation and development association (MYRADA) started to experiment with the formation of self-help groups (SHGs), based on traditional Southern to experiment with the formation of self-help groups (SHGs), based on traditional Southern Indian savings and credit groups. SHGs are effectively micro-banks, with between ten and20 women forming a group, on their own initiative, or with the help of an NGO or other self-help group promoter. Each member saves a small regular amount and the group either use their accumulated savings as a pool to be lent out to those members who need it or they may open a savings account with a nearby commercial or co-operative bank. The Reserve Bank of India (RBI) has, since 1994, allowed unregistered groups to open savings accounts and to borrow from banks. So if an SHG needs to supplement their savings fund to make loans to their members, it can borrow from a bank. The members are free to set whatever interest rate they like on their loans and they often add on a substantial margin over what they pay to the bank, in order to build their own group equity. In the early 1990s the National Bank for Agriculture and Rural Development (NABARD), the governments instrument for financial deepening in rural India,
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started to encourage the banks to accept SHGs as customers. NABARD refinances banks loans to SHGs at 5.5 percent. The banks have generally lent to SHGs at 12 percent, and the resulting spread of6.5 percent was considered adequate to cover their transaction costs. SHGs become the dominant delivery channel for microfinance in India and by the end of 2004, almost 1.5 million SHGs, with perhaps 20 million members, were said to have borrowed from banks. While this might include double counting, at least 20 percent of Indias one hundred million poor households probably have some access to formal financial services. Motivation for ICICIs linkage plan A number of factors worked together to convince ICICI Bank, Indias second largest commercial bank, to enter the microfinance market in 2002. These included priority sector targets, as well as the internal drive to be a leader in every field of banking, and the belief that some of the new micro finance clients will eventually graduate into mainstream banking. ICICI could meet its priority sector targets by lending directly to the weaker sections or by lending equivalent amounts to public sector institutions such as NABARD or SIDBI, at 6 percent or less, which these institutions then use for priority sector purposes. There are however very strong incentives, especially for private banks such as ICICI, to do a substantial amount of direct priority sector business and not to buy themselves out of their obligations with indirect investments. Microfinance, for example, can clearly be seen as a form of customer development. This played an important role in ICICIs decision to lend directly to self-help groups and individuals.

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Design of the linkage system But how does a large commercial bank reach thousands of poor people with tiny loans? ICICI Bank have developed a unique linkage methodology, through which they are now reaching close to 300 000 clients in mainly rural areas, with direct loans. Furthermore, many of these clients are in the poorest regions of India, such as in Bihar and Uttar Pradesh, home to 37 percent of Indias poorest people. The bank selects MFIs as partners who then act as managing agents for ICICI Bank. Most of these MFIs, such as PSS and BISWA which are described later in this case study, work through self-help groups (SHGs) which manage members savings and take loans to on-lend to their individual members. A smaller number of the Banks partners, however, are Grameen replicators, which follow the Bangladesh Grameen Banks method of lending to individual clients, using groups merely to facilitate and guarantee the loans for their members. The system or linkage works as follows: ICICI Bank carefully selects partner MFIs with substantial outreach and high quality microfinance portfolios. After a brief inspection of the MFIs loan accounting and monitoring systems, ICICI Bank staff visit a random sample of customers, to check the validity of the head office records and the quality of the SHGs records if they are involved. The Bank is quite clear that their intention is not to rate the strength of the MFIs own balance sheet, but its capacity to facilitate the relationships between the Bank and SHGs or other actual borrowers to whom the Bank will lend. The Bank rates the MFIs management capacity, the quality of its MIS and data reporting systems, the competence of its field staff and the quality of the training it provides to its SHGs and its own staff.

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Once an MFIs portfolio has been successfully screened by ICICI Bank and the MFI has been recognized as an approved partner, it can start to distribute loans to SHGs or individuals on behalf of ICICI Bank, drawing the necessary funds from the nearest ICICI Bank branch. Three officers of each SHG and every individual borrower from MFIs following the Grameen system sign loan agreements with ICICI Bank, not with the MFI. The agreements include photographs of the signatories and proof of residence, such as a voters or a ration card, although this may sometimes replaced by signed confirmation from the whole group or a local village leader. This process is intended to ensure that the borrowers understand that they are customers of the Bank and not of the MFI. After the loans have been disbursed by the MFI, the accounts are monitored on a sample basis for the Bank by their own locally recruited contract staff and auditors. They follow a preset procedure to verify the monthly returns submitted by the MFIs. One full-time monitor is appointed for every partner whose portfolio exceeds one million dollars. These monitors are paid only about $100 a month, but reliable and well educated people can be hired in India for this amount. They are trained to follow the required procedures and to observe obvious danger signals. Risk reduction ICICI Bank reduces its risk and ensures the commitment of the partner MFIs by taking first loss guarantees from the MFIs, which vary in amount according to the perceived quality of the loan portfolio, how long they have worked with the MFI and on the MFIs own preferences. One option is for the MFI to open a fixed deposit account for between 8 to 15 percent of the total loaned, which cannot be withdrawn by the MFI until the loans have been repaid, but can be drawn down by ICICI Bank to cover any losses. Alternatively, the MFI may be given an overdraft
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limit with ICICI Bank up to the required amount, and the Bank can then require the MFI to use this to cover any losses. A third party can also deposit the necessary guarantee on behalf of the MFI. The Grameen Foundation of the USA has done this for ICICI Bank loans channeled through Cashpor and SHARE, Indias largest Grameen replicators. Such guarantees can be used to enhance the quality of securitized loans which the Bank may choose to sell on to other institutions, and thus to improve the price obtained by the Bank. Alternatively, the loans and the associated MFIs obligations may be retained by ICICI Bank should they decide not to package or sell on the assets arising from loans to a particular group of clients. The Bank is aware that if an MFI collapsed they would have some difficulties in recovering all their dues, in spite of these precautions. However, they believe that their procedures would give them early warning of any serious problems, and the first loss guarantees provide some initial protection. As a last resort, they could perhaps sell the balance of any remaining portfolio to another MFI, or could sub-contract the collection to a debt collection agency. CONCLUSIONS ICICI Bank has designed and implemented a very innovative and apparently effective strategy to enter the micro-finance market, despite the fact that the Bank has only 88 branches outside the major cities. The partnership model enables the Bank to use the expertise and networks of specialist institutions with long experience of social and financial intermediation, without taking on the risk of actually lending money to them. Many of these institutions are financially weak, poorly capitalized, and dependent on grant funds for their survival. ICICI is lending direct to SHGs or to individual micro-borrowers, whose aggregated credit
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risks have been shown to be very low. The intermediary institutions provide their services for a fee, which is bundled with the interest paid by the final borrowers. From the MFI perspective, the linkage model has some disadvantages. The MFIs are simply loan agents, and, as illustrated in the BISWA case, they do not want their SHGs to become entirely dependent on ICICI Bank. Some MFIs are becoming financially stronger and some are already able to borrow bulk funds direct from ICICI Banks competitors, such as ABNAMRO Bank and others. It is likely that in the future many of ICICI Banks best collaborators, and particularly those taking the larger sums, will prefer to take bulk loans themselves and to onlend to their SHGs, thus enhancing their own status in the eyes of their clients. The ICICI Bank linkage will help them to do this, since ICICI approved MFIs gain status by being associated with the Bank, and the MFIs can use this to court other banks for bulk loans, in essence diversifying their partner base. Other MFIs, as has already been pointed out, may prefer to focus on their agency role, and to withdraw from direct financial intermediation. ICICIs strategy is working well for the Bank also. The portfolio is growing, and the loans are profitable. By March 2005 ICICI Banks exposure to the microfinance sector, through 27 partner MFIs, had reached $66 million. Motivated by this initial success, ICICI Bank is now extending its linkage model, to smaller MFIs, through a strategic partnership with CARE. By dealing direct with microfinance clients, the Bank can satisfy the Reserve Bank requirements to lend to the so-called weaker sections and it has created assets, which can be securitized and sold on to other financial institutions. Furthermore, the ICICI Bank loans are made to groups or to individuals and not to the MFIs. If the MFIs are unable to recover the loans, it is unclear if ICICI will be able to. The Bank has no presence in the areas where the clients live and has no
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staff of its own to collect. Another possible threat for ICICI Banks long -term success is that the SHG members will become more sophisticated. As their needs increase, they will start shopping around for less expensive loans, at better rates. Despite these concerns, ICICI Bank is demonstrating that an urban-based private bank can effectively and profitably reach the rural poor. This business is now a component of the Banks mainstream operations and other Indian and foreign banks are appreciating that the rural poor can be valuable customers. A wider range of financial services is becoming available to hundreds of millions of people who have hitherto lacked access to any formal financial services at all. This experience shows that urban based banks, with few rural branches, can make use of the community contacts and experience of rural NGOs, so that both parties can cover their costs and do what they do best, for the benefit of their clients.

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CONCLUSION: The question of how state-owned banks and their privatization affect financial sector stability And growth will continue to be an important issue for policymakers. Despite numerous privatizations in recent years, many countries continue to have financial sectors featuring significant roles for state-owned banks. State-owned banks are often associated with significant shortcomings in the preconditions for an effective banking system, such as the rule of law and strong government infrastructure, so any particular problems introduced by state banks may be obscured by these important institutional weaknesses. This is consistent with the finding that large privatizations immediately precede crises in only a few instances. In these countries, failure to establish the institutional preconditions for sound banking prior to, or at least concurrently with, the privatizations is more likely to have been a proximate cause of the crisis than the privatizations themselves.

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BIBLIOGRAPHY

WEBSITES: http://en.wikipedia.org/wiki/Privatization http://www.investopedia.com/terms/p/privatization.asp http://www.questia.com siteresources.worldbank.org/DEC/Resources/ http://wiki.answers.com/Q http://policydialogue.org http://www.scribd.com/doc www.privatisation.gov.pk www.saprin.org

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