On Wednesday, Tuhin Kanta Pandey, the secretary of the department of investment and public asset management (DIPAM) said that the new policy proposed by the Center to have not more than four public sector undertakings (PSUs) in every strategic sector may also apply to the banking sector. This will truly and essentially mean that through consolidation or privatization, the number of public sector banks (PSBs) can be brought down from the current 12 to four.
This move is a part of the bolstered, new, and clear-cut privatization policy that will also meet the policy goal to generate at least a few global-size entities in several important economic sectors, especially in areas such as energy and banking.
An attendant advantage of this initiative will be that the non-tax revenues of the government will increase significantly in the next few years, which will help it restore its fiscal strength. The slowdown in economic growth has severely weakened the government’s tax revenues.
When asked about the consolidation and privatization of PSBs by FICCI at an event organized by business organizations, Pandey said that we are working closely with the financial services sector and I think the overall framework will be the same as the one announced by the Minister of Finance. The framework is under development and will be launched soon. However, Pandey refused to elaborate on the new policy, by saying: the broader vision is not limited to commercial enterprises.
Besides this, on July 21, Reuters report stated that the BJP government led by Narendra Modi is trying to privatize more than half of the 12 public sector banks (PSBs) to lessen the number of PSBs to only 4, as part of a major overhaul of banking, according to government and banking sources. The report added that the plan will soon be submitted to the Union Cabinet for endorsement.
The report also appended that first of all, the Modi government will sell majority stakes in Central Bank of India, Bank of India, Indian Overseas Bank, Punjab & Sind Bank, UCO Bank and Bank of Maharashtra. The plan is to have at least 5 government-owned banks, one senior government official stated.
The union office-bearer said that privatization of Public sector banks is an anti-thesis to ‘Aatam Nirbhar Bharat’ and bank employees would fight endeavors against the privatization of any public sector bank.
Ironically, when the association published the names of 2,400 wilful or deliberate bank default lenders who are all private companies, news disclosed that public sector banks would be privatized. AIBEA (All India Bank Employees’ Association), general secretary, C.H. Venkatachalam, stated that this is nothing but handing over these banks to the corresponding private companies that are defaulters.
There is a case for the nationalization of private banks. But unfortunately, there are discussions about privatization, he said, by recalling the mismanagement of ICICI Bank under the supervision of former CEO.
When he opposed the privatization proposal, he said: Privatization is not a solution to the problems of public sector banks. On the other hand, the recovery of immense loans given to private companies is difficult. We have to take rigorous steps to recover these critical loans and protect our banks.
Public Sector Banks shouldn’t be Privatized-Satish Marathe said!
Satish Marathe, a board member of the RBI, stated that in the view of the country’s development needs, public sector banks should not be privatized, but the government should consider selling a larger proportion of its shares to reduce its shareholding ratio to 26%.
Marathe, who began working in a state-run bank before joining the co-operative banking sector, however, stated that public sector banks need to reform their processes, systems, and employee attitudes in order to become relevant, consistent, and efficient in the future.
He delivered the above speech at an online seminar held to commemorate the 51st anniversary of the bank nationalization.
He further said that the ownership of public sector banks must be largely owned by ordinary people. Government shareholding should be above 26% from where banks get legal provisions. He stated that private shareholding caps and other enactments must assure that no single entity or organization can exert extreme control over such lenders.
He asserted that unwinding the infrastructure formed aloft the last 51 years will be a gigantic loss and pitched for variations in systems including selling shares to the top administration to assure it has skin in the game.
He said that despite years of hard work and efforts, the country is still poor and efforts to deepen financial services have also achieved limited success.
Marathe also stated that despite the efforts of the Reserve Bank of India at financial inclusion, since 2004, more than 500 million people still elusive for the formal financial system and have not been touched by either a microfinance institution or a bank.
Regarding the need to change in practices, he quoted an example of his daughter, a trained perfumer who could not obtain a loan of Rs 1 million from a state-owned bank despite monthly efforts. He said that in addition to small businesses, state-owned banks also need to change their overall approach in rural areas.
He said that according to NITI Aayog’s research, more than 65% of income generation in rural areas is non-agricultural. It is this part that needs PSB services. He added that lenders need to treat agricultural product processing as a segment.
When talking about non-performing assets, he said that high levels of dud or sluggish assets indicate the need to change conventions.
If this is a performance, then the point is, should the nationals exchequer have to bear such a heavy burden, he said while citing estimates in a financial stability report released by the RBI on Friday that showed an increase in the NPA.
He said that no PSB employees see the bank as their own bank, so it is necessary to provide them with shares to ensure that they have skins in the game and deliver them accordingly.
NITI Aayog Yojana introduced a plan to Privatised some PSBs
Moreover, NITI Aayog Yojana introduced a plan on June 5 to privatize some Public Sector Undertaking banks. Thereafter, high-level meetings were conducted to discuss the process of privatizing public sector banks. Nirmala Sitharaman, the Finance Minister announced the intention of the center to open up all segments and areas of the industry, including strategic and vital sectors, to private capital.
The Minister of Finance also mentioned that there will be up to four public sector banks in the strategic areas. Indian Overseas Bank, Punjab and Sindh Bank, Maharashtra Bank, etc. are all names of the banks that can be privatized. However, for this to happen, the authorities will need a lot of background knowledge.
The pandemic COVID-19 has not only stopped the process of recovery of PSBs but will also adversely affect the financial health of private sector banks.
Government of India is planning to privatize more than half of its state-owned banks
Government and bank sources stated that as part of the banking industry reforms, India is planning to privatize more than half of its state-owned banks to lessen the number of government-owned moneylenders to just four.
The government official asserted that the first part of this plan will sell majority stakes in Indian Overseas Bank, Bank of India, Central Bank of India, Bank of Maharashtra, UCO Bank, and Punjab & Sind Bank, thereby effectively privatizing these state-owned lenders.
A senior government official stated that the main idea is to have 4-5 state-owned banks. Currently, India has 12 state-owned banks.
According to the sources, Government officials stated that such a plan will be proposed in the new privatization proposal currently being formulated and developed by the government and will be submitted to the Cabinet for approval. India’s Ministry of Finance declined to comment on this matter.
The source said that the privatization of any public sector bank (PSB) in this fiscal year is very unlikely due to its lower valuation and increasing asset pressure during the coronavirus crisis.
The government is formulating a privatization plan to raise funds through the sale of assets in non-core corporations and sectors when the country is strapped for funds in the case of insufficient economic growth caused by the coronavirus pandemic.
Reserve Bank of India (RBI) and several government committees have urged that India should not exceed 4-5 state-owned banks.
The senior official at a state-owned bank stated that the government has previously declared that there will be no further more mergers between state-owned banks, so they have the only option is to divest their shares. Last year, the government merged ten public or state-owned banks into four, creating some larger banks in the process.
A government official also said: Now, we are considering selling unconsolidated banks to private companies.
However, the government is working on a privatization plan, because the government assumes that banks may face an increase in non-performing loans later this fiscal year due to the impact of the coronavirus crisis.
The Rationale of Privatization of Public Sector Banks
- A large number of non-performing assets: The banking system has a heavy burden of non-performing assets(NPAs), most of which are found in public sector banks.
- The Problem of Dual Control: Public sector banks are dually controlled by the Ministry of Finance (under the Banking Regulation Act of 1949) and Reserve bank of India (under the RBI Act of 1934).
- Therefore, RBI does not have all the powers over public sector banks as it has against private sector banks, such as the power merge banks, close banks, power to revoke bank licenses or impose penalties on the board of directors.
- Lack of Autonomy: The board of directors of public sector banks is not yet professional enough, as the government is still deciding to appoint board members (because the banking bureau’s board is not fully efficient and functional). This has caused problems of politicization and interference in the normal operation of banks.
- Difference in Incentives: Public and private sector banks are driven by different incentives.
- For example, Private banks are profit-oriented, while the public sector banks’ businesses are disrupted by government programs such as agricultural loan exemptions, etc.
- Similarly, in the private sector, shareholders’ effective control over banks can also explain why there is no large-scale fraud, like in public sector banks such as the Punjab National Bank.
The source said that due to the unfavorable market environment, the divestment plan may not be completed within this fiscal year.
Indian government predicts that the non-performing loans of Indian banks may double after the crisis could be brought down the economy to a standstill.
Banks of India already have 9.36 trillion rupees ($124.39 billion) of non-performing loans, equivalent to almost 9.2% of its total assets at the end of October 2019. As a result, the government may need to inject nearly $21.2 billion into its state-owned banks.
Reuters pointed out that the increase in non-performing loans has led to an increase in non-performing assets, and the unfavorable market conditions caused by the COVID-19 epidemic may see actions in this area deferred to next year.
Regarding the privatization of several PSBs and better financial health of the public sector banks, Finance Minister Nirmala Sitharaman did not announce the capital injection in the 2020-21 budget in February this year. However, in the past few years, the government has been tracking the PSB merger process.
It is assumed that the final decision on the privatization of PSBs will take place at the end of 2020.