Bank privatization review on the cards

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 and UCO Bank. (Bloomberg)
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 and UCO Bank. (Bloomberg)

Summary

A new panel with representatives from the finance ministry, NITI Aayog and the Reserve Bank of India (RBI) is being considered to draw a fresh list of candidates for privatization

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

A new panel with representatives from the finance ministry, NITI Aayog and the Reserve Bank of India (RBI) is being considered to draw a fresh list of candidates for privatization, two people close to the matter said on condition of anonymity.

In the 2021-22 budget, finance minister Nirmala Sitharaman announced plans to privatize two state-run banks, along with IDBI Bank and a general insurance company in the fiscal year. NITI Aayog recommended two government-owned banks for privatization, and its suggestions were also put before the finance ministry. Unverified media reports suggested that the two banks were Central Bank of India and Indian Overseas Bank.

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Graphic: Mint

However, the privatization exercise was stalled because of delays in implementing the required legislative changes. With elections in 2024, it is now expected that privatization efforts can only be resumed after a new government is formed at the Centre.

“A panel is being considered to identify probable candidates from among mid- and small-sized banks for privatization. The panel may also decide the quantum of shareholding that the government would dilute in banks while deciding weightage to be given to banks with improved financial parameters and lowered bad loans," said one of the two persons cited earlier.

Spokespeople for the finance ministry and financial services secretary did not respond to queries seeking comment.

The government is looking to reassess the strengths and weaknesses of banks before deciding on their privatization amid state-run banks reporting vastly improved performance over the last few quarters, with the overall net profit of 12 PSU (public sector undertaking) banks in the June quarter surging to 34,418 crore from 15,307 crore in the year earlier. Also, state-run banks have reported significant improvements in their asset quality, with gross non-performing assets declining from a peak of 14.6% in March 2018 to 5.53% in December 2022. PSU bank stocks have also performed well on the bourses.

The government was earlier looking to privatize small banks with regional presence and those that had just come out of RBI’s prompt corrective action (PCA) plan, under which the regulator imposes curbs on lending, dividend payments and management compensation.

This would have put Central Bank, Indian Overseas Bank and UCO Bank, all under PCA earlier, as potential candidates for privatization. But with state-run banks now making smart recovery and having strengthened their finances while curbing bad loans, it is now being felt that privatization should bring maximum gains to the exchequer while providing value to the acquirer and help in further scaling up the lending landscape in the country, the people said.

Though the dates for privatization would be worked out only after the legislative exercise—including amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980—is finalized, it is now considered that the exercise would be best suited for 2024-25 by the new government. After the amendments, the shortlisted names would be approved by a group of ministers before cabinet.

Before the proposed privatization process came through, 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.

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 and UCO Bank.

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