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The government is likely to kickstart privatization in the banking sector with stake sales in two small state-run banks, Punjab and Sind Bank and Bank of Maharashtra, according to analysts.

Delivering her budget speech on Monday, finance minister Nirmala Sitharaman said the government plans to privatize two sate-run banks along with IDBI Bank in the next fiscal.

Sitharaman said legislative changes will be introduced during this parliamentary session to enable the divestment.

After the merger of 13 public sector banks into five last year, Sitharaman was expected to make a policy announcement on privatization of state-run banks in next fiscal year’s budget as a first step towards overhauling the banking sector.

She, however, did not specify the names of the other two banks that the government aims to privatize and the size of stakes that would be sold.

Analysts expect the government to test waters by first privatizing the smaller state-run banks that were excluded from the merger last year.

Among the six banks that were not part of the merger, Punjab and Sind Bank and Bank of Maharashtra are the most likely candidates as much of the clean-up of the balance sheets has already taken place.

Both have also received significant capital infusion from the government in the last few years, which has helped resolve their bad loans. Bank of Maharashtra’s gross non-performing assets (NPAs) as a percentage of total assets stood at 7.69% at the end of September quarter, whereas Punjab & Sind Bank’s gross bad loan ratio was at 5.87%.

Punjab and Sind Bank was the only bank to receive capital infusion of 5,500 crore this fiscal. Bank of Maharashtra exited the prompt corrective action (PCA) framework after getting nearly 7,800 crore of capital in FY18 and FY19.

“Given the six banks kept out of merger, three are under PCA, Indian Overseas Bank, Central Bank, and UCO Bank. These banks are unlikely to be offered for privatization because of poor investor demand. Further the government is unlikely to consider Bank of India because of its large size," said Anil Gupta, vice- president, and sector head, financial sector ratings, ICRA Ltd.

That said concerns remain on how the government will proceed with its plan as lowering sovereign support could affect depositor confidence in these banks. Many successive governments had promised to privatize state-run banks, but did not do so on political concerns.

The stock market cheered the announcement with Bank Nifty galloping 8.26%, led by stocks such as ICICI Bank, which soared 13% and State Bank of India, which rose 11%.

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