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Privatising two government banks realistic, but prepare ground first

Privatisation ensures robustness in India’s banking system and expands capacity with increased credit and liquidity.

Published: 20th February 2021 07:31 AM  |   Last Updated: 20th February 2021 07:31 AM   |  A+A-

Bank, Banks

In 2019, when 13 PSBs were merged, six were purposefully left out of the pre-blitz banking consolidation drive. (Representational Photo)

The government has decided to sell two state-run banks next fiscal, but the privatisation proposal itself is no spring chicken. It’s been briefed out earlier, yet each time it sounds like a fresh economic miracle for a long-pending problem. From 27, we now have a dozen Public Sector Banks (PSBs) but even that’s an excess. Privatisation ensures robustness in India’s banking system and expands capacity with increased credit and liquidity.

In 2019, when 13 PSBs were merged, six were purposefully left out of the pre-blitz banking consolidation drive. Now, the move to shortlist two PSBs seems realistic, but first the government must shore up intestinal fortitude in passing legislative amendments for privatisation to take off. Foremost among them is amending the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

This needs strong political will. Separately, long-pending banking reforms must be implemented as PSBs operate under dual control of the RBI and Ministry of Finance—the RBI Act, 1934, and the Banking Regulation Act, 1949. This must change as the RBI lacks total control of PSBs unlike private peers, where it can revoke a banking licence, merge, shut down or penalise a bank board.

Besides, the RBI must strengthen enforcement and supervision to avoid troublesome episodes seen at top private banks including ICICI, Axis and Yes Bank. Lastly, it’s about time the PJ Nayak Committee recommendations to improve PSBs’ governance and management are executed. All six banks have sizeable bad loans, so it’s essential to breathe life into the proposed bad bank concept. Else, no investor would be willing to bet his bottom dollar with toxic assets on the books.

Further, the emphasis on a speedy resolution of NPAs through Insolvency and Bankruptcy Code should find its lost vigour. Lastly, trade unions will object to it, so the government needs to find a workaround. In essence, multiple moving parts must be co-aligned, else all attempts towards bank privatisation will be akin to running faster to stay at the same place. 


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