The government has started inter-ministerial consultations to draft the legislative changes necessary for the privatization of public sector banks (PSBs). The plan, according to official sources, is to opt for amending the relevant laws all at once, so that the PSB privatization process is not hampered by legal obstacles.
Discussions are underway within the government on the advisability of repealing the laws on banking companies (acquisition and transfer of companies) of 1970 and 1980 (laws on nationalization). The 10% voting rights ceiling for a non-governmental shareholder regardless of their shareholding is one of the main constraints identified, according to the sources.
The provision of the 1949 Banking Regulation Act, according to which no shareholder of a banking company – PSB or private bank – can exercise a voting right of more than 26%, is also being revised, they add. .
In the FY22 budget speech, Minister of Finance Nirmala Sitharaman announced the government’s plan to privatize two PSBs and a general insurance company during the current fiscal year. This is seen as part of a larger process of privatizing more PSBs. While the Niti Aayog has reportedly identified a few PSB candidates for privatization, the RBI and the government are in talks on the privatization of the two banks during the current year.
According to the sources, before repealing the laws on the nationalization of banks, a procedure must be developed for the passage of the PSB from these laws to the law on companies. Precedents in this area are under study. Other companies have passed other laws to company law, but no nationalized has yet experienced such a transition. There were 5 to 6 banks, including Axis Bank, ICICI and IDBI Bank, which at one time belonged to the state, but which were not nationalized banks. Consequently, their privatization went smoothly. After consultations and seeking legal advice, legislative action on the nationalization acts and the banking regulation law is expected during the monsoon session of Parliament.
“Granting higher voting rights to promoters will be the right step towards a more liberal banking system. Banks should go the extra mile by adopting the right governance mechanism. This is necessary to convince tyeh RBI to change its current position of limiting the control of promoters, ”said Shravan Shetty, MD – Financial Services, Primus Partners.
No less than 14 private banks were nationalized in 1970 by the Indira Gandhi government, followed by six other banks in 1980. The Narendra Modi government is trying to free the grip of the public sector by encouraging private actors to acquire public assets. Recently, he repealed the law governing the BPCL to pave the way for its privatization.
Already, the NDA government has undertaken a series of consolidation exercises in the public sector banking space. As a result, the number of public banks has increased from 27 in 2017 to 12 now. The idea is to create a few strong banks to support the economy’s growing appetite for credit, help reverse the trend of economic growth and reduce costs through greater synergy. According to the new strategic sector policy, the government will ultimately retain a maximum of four public banks while privatizing or merging others.
As FE previously reported, the Niti Aayog called on the government to retain control of the country’s four major public lenders – State Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank – while recommending that three smaller PSBs – Punjab & Sind Bank, Bank of Maharashtra and Uco Bank – privatized as a priority. As for the other five PSBs (Bank of India, Union Bank, Indian Overseas Bank, Central Bank and Indian Bank), the government can either merge them with the four largest it chooses to keep or reduce its stake in these within a specified time. -frame at 26%, before being released completely, according to an earlier proposal by Niti Aayog.
Between FY15 and FY20, the Center had to inject as much as Rs 3.2 lakh crore to consolidate the capital base of PSBs linked to bad debts. Yet their market capitalization has steadily and substantially eroded in recent years even before the Covid-19 pandemic hit them.