Paving the way for privatisation of public sector banks
With just eight months left in the current fiscal, it’s a race against the clock for the government to privatise two public sector banks. In February, Finance Minister Nirmala Sitharaman pledged to privatise two PSBs (besides IDBI Bank) and one public sector insurer within this fiscal. She even assured faster introduction of legislative amendments to banking laws that mandate minimum government ownership of 51% in PSBs.
So the government must table amendments in the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, before proceeding with privatisation plans. To honour the commitments made during Budget 2021, it’s essential to bring the Bills to Parliament in the ongoing Monsoon Session.
Besides amending banking laws, creation of the proposed bad bank also appears elementary as it allows shifting bad loans from banks’ books before stake sale. Such a move makes balance sheets leaner and cleaner, and helps rake in more dough. But before any of this, the government must first settle with hostile employee unions, who threaten nationwide strikes at the drop of a hat. The banking sector is one of the largest employers and given rising unemployment, any move towards privatisation is bound to attract stern opposition.
While the asset quality of banks improved, the pandemic has affected PSBs’ profitability and credit offtake. Worryingly, they are also losing market share, particularly in retail space. Lower profitability will burden the government to recapitalise banks to attract suitors. PSBs play a crucial role in funding infrastructure projects and priority sector lending. As the country needs additional focus on both, the government must ensure that privatisation doesn’t throw a spanner in the works. Until now, banking consolidation saw three rounds of mergers, reducing the number of PSBs to 12 from 27. But now, it’s essential that the government avoid token privatisation via capital infusion by another state-run company, particularly given precedents like state-owned Life Insurance Corporation bailing out IDBI Bank Ltd.