RePrivatisation of PSBs

A rumour or truth?
REUTERS News: 20 JULY
 India is looking to privatise more
than half of its state-owned banks
to reduce the number of
government-owned lenders to
just five as part of an overhaul of
the banking industry, government
and banking sources said.
 Several government
committees and the Reserve
Bank of India have
recommended that India
should have not more than
five state-owned banks.
 “The government has already said
that there will be no more
mergers (between state-owned
banks) so the only option for
them is to divest stakes,” a senior
official at a state-owned bank
said.
“Now we are thinking of
selling the unmerged banks
to private players,” the
government official said.
Which banks are (un)merged banks?
Unmerged Banks: 6
 1. Bank of India(1969)

 2. Central Bank of India (1969)

 3.Indian Overseas Bank (1969)
 4. UCO Bank (1969)
 5. Bank of Maharashtra (1969)
 6. Punjab & Sind Bank (1980)
 Privatisation
of Punjab & Sind
Bank, UCO Bank and Bank of
Maharashtra will require an
amendment to Banking
Companies (Acquisition and
Transfer) Act of 1970
NitiAayog has also
suggested bringing in
flexibility for NBFCs
participation in the
bond markets.
Satish Marathe:
a board member of the RBI
MARATHE ON PRIVATISATION
 Inthe view of the country’s
development needs, public sector
banks should not be privatized, but
the government should consider
selling a larger proportion of its shares
to reduce its shareholding ratio
to 26%. (So the govt. has skin in the
game to block special
resolutions/decisions)
What are special resolutions?
 1. change of company’s line of
business
 2. change of company’s name
 3. modifications in company’s by-laws
 4. buy-back of shares
 5. inter-coporate loans and

investments crossing the permissible

threshold limits
 6. selling or disposing of
company’s substantial
business
 7. mergers and demergers
 8. removal of auditors
 9. shifting the registered office

from one state to the another

 
The Rationale of Privatization of Public Sector Banks

 A large number of non-performing assets:

The banking system has a heavy burden of
non-performing assets(NPAs), most of which
are found in public sector banks.
 The Problem of Dual Control: Public sector
banks are dually controlled by the Ministry of
Finance (under the Banking Regulation Act of
1949) and Reserve bank of India (under the RBI
Act of 1934).
 Therefore, RBI does not have all the
powers over public sector banks as it has
against private sector banks, such as the power
merge banks, close banks, power to revoke
bank licenses or impose penalties on the board
of directors.
 Lack of Autonomy: The board of directors of
public sector banks is not yet professional
enough, as the government is still deciding to
appoint board members (because the banking
bureau’s board is not fully efficient and
functional). This has caused problems of
politicization and interference in the normal
operation of banks.
 Difference in Incentives: Public and
private sector banks are driven by
different incentives. For example,
Private banks are profit-oriented,
while the public sector banks’
businesses are disrupted by
government programs such as
agricultural loan exemptions, etc.
 Similarly,
in the private sector,
shareholders’ effective control over
banks can also explain why there is no
large-scale fraud, like in public sector
banks such as the Punjab National
Bank.
No capital injection in Budget 2020-21

 Banks of India have 9.36 trillion

rupees ($124.39 billion) of NPAs,
almost 9.2% of its total assets at
the end of October 2019. As a
result, the government may need
to inject nearly $21.2 billion into
its state-owned banks.
 anincrease in NPAs, and COVID-
19 epidemic disruption may see
actions in this area deferred to
next year. It is assumed that the
final decision on the privatization
of PSBs will take place at the end
of 2020.
“Perhaps reprivatising
some of the
nationalised banks is
an idea whose time has
come?”
April 29, 2017
How to privatise?
Divestment beyond majority stake is the first
step because because it will help relax the
fiscal constraint in terms of dependence of
public sector banks on the government for
capital.

Divest stakes in a graceful manner at right prices

 ‘Sell PSUs
now, don’t
wait, stock
market
is buoyant’
 July 9, 2020
privatisation of public sector banks is
not panacea for all ills
December 14,2018
Public sector banks might perform
better if they are freed from some
of the constraints they operate
under but such freedom typically
requires distance from the
government
On 20th January, 2014
RAJAN constitutes P J NAYAK
COMMITTEE (The Committee to
Review Governance of Boards of
Banks in India) and submitted its
report on 12th May, 2014.
BANKBOARD BUREAU(BBB) was a step
towards governance reforms in PSBs
recommended by P J Nayak
committee.

BBBwas the part of Indradhanush Plan

of Government.
PJ Nayak Committee
Recommendations
 Repeal the Bank Nationalisation Act (1970,
1980), the SBI Act and the SBI Subsidiaries
Act. This is because these acts require the
government to have above 50% share in the
banks.
 After the above acts are repealed, the

government should set up a Bank

Investment Company (BIC) as a holding
company or a core investment company.
 The government to transfer its share in the
banks to this BIC. Thus, the BIC would
become the parent holding company of all
these national banks, which would become
subsidiaries. As a result of this, all the PSBs
(public sector banks) would become
‘limited’ banks. BIC will be autonomous and
have the power to appoint the Board of
Directors and make other policy decisions.
 Until the BIC is formed, a temporary
body called the Bank Boards Bureau
(BBB) will be formed to do the
functions of the BIC. Once BIC is
formed, the BBB will be dissolved.
 The BBB will advice on appointments

to the board, banks’ chairman and

other executive directors.
Tuhin Kanta Pandey:DIPAM

PSU banks
included under
new privatisation
policy

DIPAM Secretary
 Take away for
BANK EXAM ASPIRANTS
 Consolidation: Merger of India Post and RRBs
 Majority stake sale: Leading to Privatisation
 Vacancies: no major impact but creation of

news kinds of vacancies

 Salary: Likely to continue the existing trend
 Work culture: Likely to improve
 Private
banks are
superior to
government
banks on
most counts:

productivity,
asset quality,
return on assets,
and return on equity.