Bank Privatization Update: Government is preparing for privatization of many banks

 

Along with better performance, public sector banks have also reduced bad loans. Meanwhile, the government is busy making new preparations for privatization. A review of the list of public sector banks is being planned by representatives of the Reserve Bank of India along with the Finance Ministry.

According to a Live Mint report, a new panel with representatives from the Finance Ministry, NITI Aayog and the Reserve Bank of India is being considered to prepare a new list of candidates for privatization. NITI Aayog recommended privatization of two public sector banks and its suggestions have also been placed before the Finance Ministry. These two banks are said to be Central Bank of India and Indian Overseas Bank.

It has been said in the report that these two banks were discussed by Finance Minister Nirmala Sitharaman in the budget of 2021-22. Along with this, privatization of IDBI Bank and a general insurance company was also announced. However, due to some reasons this plan was halted and now its exercise is expected to start again in view of 2024.

The central government is considering a panel to identify some of the medium and small-sized banks for privatization. According to the report, the panel can also decide how much stake the government will reduce in banks. Besides, a decision can also be taken on the weightage given to banks having better financial parameters and reducing bad loans.

Before the proposed privatization process, banks have merged weak banks into bigger banks to strengthen small banks. A total of 10 public sector banks were merged from 1 April 2020. There are currently 12 public sector banks in India, up from 27 in 2017.

The 12 PSB banks include State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Punjab and Sindh Bank, Indian Bank, Union Bank of India, Bank of India, Bank of Maharashtra, Central Bank of India, UCO Bank and Indian Overseas. Banks are included.

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No public sector bank privatisation till 2024 general election: Top Government Official

The much-awaited privatisation of public sector banks (PSB) is unlikely to happen before the 2024 general elections, according to a senior government official. "Nothing is going to happen before the 2024 general elections. We don't have legislation yet for it — without that privatisation is not possible," said the official, requesting anonymity.

Amendments would be required to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, for privatisation, the official said, adding that these Acts, which formed the basis for nationalisation of banks in two phases, need to be changed for privatisation.

India currently has 12 public sector banks: Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab & Sind Bank, Punjab National Bank, State Bank of India, UCO Bank, and Union Bank of India.

Bank privatisation has been on the anvil for successive governments but the plan hasn’t progressed due to stiff opposition from trade unions.

Finance Minister Nirmala Sitharaman, while presenting Budget 2021-22, had announced the privatisation of Public Sector Banks (PSBs) as part of the disinvestment drive to garner Rs 1.75 lakh crore.

At that point, the FM had said that other than IDBI Bank, the government proposes to take up the privatisation of two public sector banks and one general insurance company in 2021-22. But, this announcement wasn’t followed up.

"Every government takes the decisions at the right time. So, I don't think that anything is going to happen before the general elections," the finance ministry official quoted earlier added.

According to the official, the IDBI bank case is different because it is not a public sector bank but a ‘private sector’ bank in which the government holds a stake.

United Bank of India; Allahabad Bank became part of Indian Bank; Canara Bank subsumed Syndicate Bank; and Andhra Bank and Corporation Bank merged with Union Bank of India. Earlier, SBI had merged five of its associate lenders with itself, while Vijaya Bank and Dena Bank were merged with Bank of Baroda.

“If the government had gone for privatisation earlier it would not have got good value, as banks were in bad shape. Now, after lots of injection of capital, banks' balance sheets are in good shape,” said Naresh Malhotra, a former State Bank of India senior official.

"If the government does it this time, it will get a good valuation. They can do it. Also, they should wait a little more, so that the situation stabilises a little more. The balance sheets can be better. If you ask me, the government shouldn’t be in banking,” Malhotra added.

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PSU Banks are pillars of economic development, fostering growth, Though in real danger of Privatisation- AIBOC

 

All India Bank Officers' Confederation (AIBOC), the body of bank officers in the country, on Tuesday, said state-run lenders are in "real danger of privatisation" despite playing a crucial role in closing the economic divide in society.

On the occasion of the 55th Bank Nationalisation Day in India on Wednesday, the Guwahati-headquartered body said public sector banks (PSBs) have played an important role in promoting financial inclusion and mobilising savings since the nationalisation of the lenders in 1969.

"Public Sector Banks are in real danger of privatisation. It is an ideological conflict that can be overcome by supporting the alternative ideology that prioritises the welfare of a larger human population," AIBOC general secretary Rupam Roy said.

Since their nationalisation, these PSBs have been channeling funds to vital sectors such as agriculture, small and medium-sized enterprises (SMEs), education, and infrastructure among others, he added.

"They have been the pillars of economic development, fostering growth and providing millions of Indians with access to banking services," the statement said.

AIBOC said as income inequality becomes an urgent issue in society, PSBs play a crucial role in closing the economic divide, ensuring banking access to the underserved segments of society to foster a more equitable economic environment.

"As an appropriate measure to scrutinise the commercial activity of PSBs, the government should consider funding the cost of services rendered by PSBs at market value when it asks them to carry out its social agenda," it added.

Roy in the statement said as the largest shareholder in PSBs, the government is the biggest beneficiary of the dividends paid by the state-run banks out of the profit.

"This is in addition to the corporate taxes and other taxes that all corporations, including PSBs, are required to pay. The per employee customers for SBI is 1,900, whereas for HDFC it is 530 and for Axis Bank it is 325," he added.

Therefore, the norms and benchmarks for these India-specific PSBs must be devised specifically and their performance must be compared and contrasted amongst themselves, the AIBOC official said.

Roy further said the employees of the public sector lenders have played a crucial role in upholding national values and serving citizens with the utmost commitment.

"They have endured a variety of economic cycles, exhibited resiliency, and continued to provide vital banking services uninterrupted even during difficult Covid periods and during calamities," he added.

Roy pointed out that despite their diligent efforts, bank employees face numerous difficulties and the inadequacy of recruitment in PSBs has put a tremendous strain on the existing workforce, depriving them of much-needed leisure and work-life balance.

"In addition, it is of significant concern that pensions for retirees, who have devoted their careers to nation-building, have not been revised and increased on a par with government and RBI employees," he added.

The AIBOC urged policymakers, regulators, and other interested parties to recognise the invaluable contributions of the PSBs and their employees.

"Addressing their legitimate demands and ensuring their well-being is essential to preserving the nationalisation ethos and fortifying our financial sector for a prosperous future," it added. 

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All these government banks will be in the list of Privatization

 The government is likely to set up a panel of experts to prepare a list of Public Sector Banks (PSBs) that can be privatised, report said, quoting people aware of the developments. The centre is looking for ways to privatise PSBs as they have turned profitable and bigger, and fewer in number after several rounds of consolidation.

Previously, in April 2021, NITI Aayog had recommended the disinvestment of two state-run banks to the disinvestment department. Subsequently, the Central Bank of India and the Indian Overseas Bank were chosen for the purpose. However, no further steps were taken in this direction, the report said.

The report quoted a government official as saying, "A new committee may be set up to identify lenders for privatisation, which include mid- and small-sized banks, and determine the quantum of the stake sale based on their performance, including their bad loan portfolio among other parameters."

The panel is likely to have officials from the Department of Investment and Public Asset Management, the Reserve Bank of India, and the NITI Aayog.

Speaking on the matter, a govt official said that bank privatisation was part of a government strategy. However, now that all public sector banks have turned profitable, a reassessment of the situation is required.

The Nifty PSU Bank Index (an index that tracks the performance of PSU bank shares in the stock market) went up 65.4 per cent in the last year. Compared to this, Nifty50 (an index that tracks the broader Indian stock market) only grew 16 per cent.

The proposed privatisation plan is likely to focus on 12 smaller PSBs which may include the likes of Bank of Maharashtra and UCO Bank. Big PSBs like State Bank of India, Punjab National Bank, and Bank of Baroda are not being considered for privatisation.

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IOB, Central Bank divestment on the fast-track

The Centre plans to accelerate the process of privatisation of the Indian Overseas Bank (IOB) and Central Bank of India after the two banks posted good quarterly results, finance ministry sources said. The government’s public policy think tank Niti Aayog has already proposed the names of these two PSBs to the core group of Secretaries on Disinvestment (CGD) for privatisation.

“We had to put a halt to the privatisation process in between because of the protests by bank associations and State elections. But now, after the banks registered positive results in the December quarter, it will gather steam. CGD is assessing the proposal submitted by Niti Aayog, which will then go to the Cabinet committee for final approval,” an official told this newspaper.

Another official pointed out that there is no provision for privatisation of banks in the Bank Nationalization Act. So, an amendment is needed in the Act to privatise the state-owned lenders. “A few amendments have been proposed to the Banking Regulation Act and Bank Nationalisation Act to facilitate the privatisation.

We are trying to make an attractive scheme related to employees’ compensation to avoid strikes,” he added. In the October-December quarter, Chennai-based IOB’s net profit doubled to Rs 454 crore against Rs 213 crore in the year-ago period. In the same period, Mumbai-based Central Bank of India registered a 69% increase in its net profit at Rs 279 crore.

More banks to be identified later

After the completion of the privatisation of IOB and CBI, the Centre will identify other banks for disinvestment in the coming years. The government wants only four large PSBs in the country.

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Bank privatisation to be kickstarted soon

The finance ministry is expected to soon seek cabinet approval for amendments to the Banking Regulation Act, 1949, and possibly other legislation as it kickstarts the process to privatise two state-run lenders. The proposed changes could include the removal of the 20% foreign investment cap applicable to public sector banks in these two cases, a senior government official told ET. A more attractive voluntary retirement scheme (VRS) for employees of these two banks may also be proposed to the cabinet.

Inter-ministerial consultations have been completed on a draft cabinet note on the proposed amendments. "We have incorporated the relevant suggestions and a final proposal will soon be put for final consideration and approval of the cabinet," the official said.

Finance minister Nirmala Sitharaman had in her budget speech last year announced privatisation of two state-run banks as part of the government's disinvestment programme without naming any lenders. Subsequently, in April 2021, the NITI Aayog had shortlisted two banks without identifying them.

Reports suggest that these are Central Bank of India and Indian Overseas Bank.

The government is likely to retain at least 26% of the lenders for the first few years. The extent of the stake sale will depend on interest from investors and market conditions. Foreign investment is limited to 20% in public sector banks under the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80. A higher threshold will make these banks more attractive to investors. This will require amendment to the latter as well as incidental changes to the Banking Regulation Act.

That won't be needed for the separate plan to divest stakes in IDBI Bank. "These changes are not needed in IDBI Bank as it was set up under the Companies Act," said the official cited above. Plans are also underway to invite expressions of interest for the stake sale in IDBI Bank, in which the government and LIC own 45.48% and 49.24%, respectively.

The government had earlier listed the Banking Laws (Amendment) Bill, 2021, in the winter session of parliament to provide the necessary legal framework for privatisation of public sector banks, but it was not moved for consideration, possibly because of the assembly elections in five states. Following victory in four states in the elections, the government is widely expected to press ahead with its reform agenda. Bank unions have opposed the move and sought more public consultation with stakeholders, including workers, before taking any further steps.

Source- The Economic Times

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PSU banks: Any takers?

 

It is reported that after Finance Minister Nirmala Sitharaman’s Budget announcement, the NITI Aayog had suggested a couple of banks for privatisation to the Core Group of Secretaries on Disinvestment headed by Cabinet Secretary in April.

The government is introducing a Bill in Parliament to enable privatisation of PSU banks. Bank unions are opposing the move. It seems the government plans to privatise Indian Overseas Bank and Central Bank of India.

The Bill may be passed but the real challenge will be known only when the government starts executing the move.

Central Bank of India has a market cap of around ₹19,600 crore and Indian Overseas Bank’s (IOB) market cap is at ₹41,100 crore. The government’s holding in Central Bank is 93.08 per cent and in IOB it is 96.38 per cent.

To realise the value as per market price the government should be able to sell these banks for ₹18,200 crore and ₹39,600 crore.

Since private industrial houses are not allowed to own banks, they are not in the fray. So the prospective buyers have to come from the existing private commercial banks or private payments banks and private small finance banks. Some NBFCs may also be in the fray.

Payments banks are already having a tough time as they cannot lend and there is a cap on per customer deposit. As a result many of them are considering to convert into small finance banks. Payments banks and small finance banks do not have the financial muscle to buy PSU banks. When the RBI allowed well run NBFCs with assets of ₹50,000 crore and above and 10 years of operations could be considered for conversion into banks, NBFCs were reluctant to take up that proposal.

So PSU banks are likely to be sold to new generation private banks. But will these banks be interested? The work culture of PSU banks with a huge manpower may deter them.

Apart from profitabilility PSU banks have other objectives such as financial inclusion. Though the government banks also aim for profitability, they predominantly function to serve common man. But the private banks’ main goal is shareholders’ wealth creation. This model results in the government banks having huge manpower strength.

The Finance Minister has assured that PSU banks’ employees interests will be taken care during privatisation. Hence there cannot be any retrenchment of staff and all the existing industrial level wage settlements will prevail.

Staff Issues

As of March 2021, IOB has a staff strength of 23,579 and its business per employee is ₹15.6 crore. Net profit per employee is ₹3.52 lakh. For Central Bank the staff strength is 32,335 and its business per employee ₹15.04 crore. Net loss per employee is ₹2.74 lakh.

Now compare this with private banks. ICICI Bank’s per employee business is ₹16.87 crore and per employee profit is ₹16.40 lakh. The corresponding figures for HDFC Bank are ₹20.54 crore and ₹25.91 lakh.

The government banks have obligation of pension payment to its retirees. Though the banks have adequate pension fund as per actuary estimation to take care of the future obligation, the prospective buyer may not be comfortable as there is some amount of uncertainty of future obligations.

Since the ICICI Bank, HDFC Bank and Kotak Mahindra Bank have huge staff strength, adding more employees and aligning them with the new work culture while buying a PSU bank may be a challenge.

ICICI Bank staff strength is around 98,000 and HDFC Bank staff strength is around 1,20,000. Kotak Mahindra Bank staff strength is around 71,000. So if the government bank is taken over these banks or by any other private banks, the staff addition will be huge and it will be a challenge to transform them all to the new culture.

It is also not clear why the government wants to sell these banks. If it is to mop up resources, then it can very well reduce the government shareholding to just 51 per cent and off load the balance to the public.

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Bank officers’ union launches nationwide movement against privatisation

Bank officers’ union on Tuesday launched nationwide movement against proposed privatisation of stat-owned lenders. ‘Bank Bachao Desh Bachao Rally’ was held at New Delhi’s Jantar Mantar on Tuesday attended by officers and other stakeholders from various parts of the country, the All India Bank Officers’ Confederation (AIBOC) said in a statement.

Addressing the rally, AIBOC General Secretary Soumya Datta appealed to the government to withdraw the Banking Laws (Amendment) Bill, 2021, which has been listed for introduction and passing in the winter session of Parliament.

“In case the government tables and passes the bill paving the way for the privatisation of the public sector banks, the bank officers will unite all the stakeholders of the banking sector and launch a nationwide agitation,” he said, urging the bankers to draw inspiration from the farmers movement.

Finance Minister Nirmala Sitharaman while presenting Budget 2021-22 earlier this year had announced the privatisation of public sector banks (PSBs) as part of disinvestment drive to garner Rs 1.75 lakh crore. The Banking Laws (Amendment) Bill, 2021, to be introduced during the session is expected to bring down the minimum government holding in the PSBs from 51 per cent to 26 per cent.

In the last concluded session, Parliament passed a bill to allow privatisation of state-run general insurance companies. The General Insurance Business (Nationalisation) Amendment Bill, 2021, removed the requirement of the central government to hold at least 51 per cent of the equity capital in a specified insurer.

The Act, which came into force in 1972, provided for the acquisition and transfer of shares of Indian insurance companies and undertakings of other existing insurers in order to serve better the needs of the economy by securing the development of general insurance business.

Government think-tank NITI Aayog has already suggested two banks and one insurance company to Core Group of Secretaries on Disinvestment for privatisation. According to sources, Central Bank of India and Indian Overseas Bank are likely candidates for the privatisation.

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