Review of bank privatization is imminent

NEW DELHI :The government plans to review the list of state-owned banks slated for privatization given improved profitability and a significant decline in non-performing loans.

A new panel including representatives from the finance ministry, the NITI Aayog and the Reserve Bank of India (RBI) is set to draw up a new list of privatization candidates, two people familiar with the matter said on condition of anonymity.

In Budget 2021-22, Finance Minister Nirmala Sitharaman announced plans to privatize two state-owned banks as well as IDBI Bank and a general insurance company in the financial year. NITI Aayog recommended privatization of two state-owned banks and its suggestions were also submitted to the finance ministry. According to unconfirmed media reports, the two banks were the Central Bank of India and the Indian Overseas Bank.

However, privatization stalled due to delays in implementing the necessary legislative changes. With elections in 2024, it is now expected that privatization efforts can resume only after a new government is formed at the Centre.

“Consideration is being given to setting up a committee to identify potential candidates from medium and small banks for privatization. “The panel can also decide on the level of stakes that the government would dilute in banks, while also deciding on the weightage given to banks with improved financial parameters and fewer bad loans,” one of the two people mentioned earlier said.

Spokespeople for the Treasury Department and the Financial Services Secretary did not respond to requests seeking comment.

The government is trying to re-evaluate the strengths and weaknesses of banks before deciding on their privatization as state-owned banks have reported significantly improved performance in the last few quarters with 12 PSU (Public Sector Undertakings) banks reporting total net profit in the June quarter surging to 34,418 crore from 15,307 crore the year before. State-owned banks have also reported significant improvements in asset quality, with gross non-performing assets declining from a high of 14.6% in March 2018 to 5.53% in December 2022. The stocks of PSU banks have also performed well on the stock exchanges.

Previously, the government had sought to privatize small banks with regional presence as well as those that had just emerged from the RBI’s Prompt Corrective Action (PCA) plan, under which the regulator imposes restrictions on lending, dividend payments and management remuneration.

This would have identified the Central Bank, Indian Overseas Bank and UCO Bank, all of which were previously under PCA, as potential candidates for privatization. However, as the state-owned banks have now recovered significantly and strengthened their finances while curbing bad loans, it is now felt that privatization should bring maximum profits to the treasury while creating value for the buyer and helping to further expand the lending landscape expand the land, people said.

Although the dates for privatization would be set only after the completion of the legislative work – including amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 – the new Government now believes the exercise would be best suited for 2024-25. Under the changes, the shortlisted names would be approved by a group of ministers before Cabinet.

Before the planned privatization process came about, the government also carried out a merger of state-owned banks, merging weaker banks with the stronger ones. A total of 10 public sector banks have been merged with effect from April 1, 2020. There are currently 12 public sector banks in India, up from 27 in 2017.

The 12 PSBs are State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Punjab & Sind Bank, Indian Bank, Union Bank of India, Bank of India, Bank of Maharashtra, Central Bank of India and Indian Overseas Bank UCO -Bank.

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Sybil Alvarez

"Incurable gamer. Infuriatingly humble coffee specialist. Professional music advocate."

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