Home / Companies / News /  Privatization of PSBs now likely only after 2024 polls

NEW DELHI : The plan to privatize two banks and a government insurer may be put on hold until at least the general election in 2024, when the proposal will be re-assessed by the new administration, three officials aware of the development said.

The privatization process of the banks, requiring changes to the Banking Regulation Act, has been put on hold as further work remains to be done before proceeding with the plan, they said, requesting anonymity.

The process has been suspended indefinitely because the bearish market conditions and concerns about a global recession would also depress valuations, one of the three people cited earlier said.

The Union budget for the year starting 1 April proposed amendments to the Banking Regulation Act, the Banking Companies Act and the Reserve Bank of India Act. But such amendments will only be carried out to improve bank governance and boost investors’ protection, and not to let the government reduce its equity in public sector banks (PSBs) and remove the 20% foreign investment cap in PSBs. The amendments are needed to allow the privatization of PSBs.

Queries sent to the spokesperson for the finance ministry and the secretary of financial services remained unanswered till the time of going to press. However, a finance ministry official said that privatization of PSB is not on the table for now.

“There’s no plan to privatize banks in FY24. Till the time the government brings in the required legislation to privatize, any plan in that direction is immaterial," Tuhin Kanta Pandey, secretary of the department of investment and public asset management (Dipam), said in an interview.

He added that no legislation had been moved to facilitate PSB privatization, and the amendment proposed in the budget was aimed at improving investor protection.

In the FY22 budget, finance minister Nirmala Sitharaman announced that two state-run banks, along with IDBI Bank, would be privatized in the year. NITI Aayog has shortlisted two PSBs for privatization but did not name them. Sitharaman had also said that a general insurance company would be sold in FY22.

But little progress since the announcement was made, while opposition to privatization by PSB bank employees grew, complicating the process. “The decision to postpone PSB privatization is also in the wake of stiff resistance that came from bank employees. No one wants to take a chance and face public ire over the move ahead of facing the Indian electorate in 2024," the second person said.

The government is also monitoring investor interest in IDBI Bank’s strategic sale to iron out any regulatory issues involved in the privatization of the two public sector lenders. Separately, consultations with the Reserve Bank of India are on to fast-track resolution of all regulatory matters.

People aware of the development said that though the privatization may not happen now, a panel of secretaries had zeroed in on Central Bank and Indian Overseas Bank as possible candidates for sell-off. This list of potential targets was to be presented to a group of ministers for approval once the legislative procedure was over, paving the way for the government to sell its stake in these public sector banks.

People in the know said that Indian Overseas Bank and Central Bank were the top two candidates favoured for privatization, though Bank of Maharashtra also found favour for the exercise, but at a later date.

The government had earlier indicated that banks under prompt corrective action (PCA) framework or weaker banks would be kept out of privatization as it would be difficult to find buyers for them. This would have left three PSBs—Indian Overseas Bank, Central Bank and UCO Bank—out of the government’s disinvestment plan. But UCO and IOB both were taken out of PCA in September 2021 on improved financials, with the banks reporting profits while significantly reducing bad loans. Central Bank came out of PCA in September.

Prior to the privatization process, the government also undertook a merger of state-run banks, amalgamating weaker banks with the stronger ones. A total of 10 public sector banks were merged with effect from 1 April 2020. India currently has 12 public sector banks, down from 27 in 2017.

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