Avoidable delay

Govt should soon start the PSB privatisation process

Privatisation of public sector banks (PSBs) is unlikely to happen in the current year. Finance Minister Nirmala Sitharaman in a written reply to Parliament said that the Cabinet has not taken any decision in this regard. Ms Sitharaman had announced in this year’s Budget that the government will take up the privatisation of two PSBs. Since the government did not move the enabling Bill in the winter session, which ended on Wednesday, the process is unlikely to be completed before the fiscal year ends. The government will need to get the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980, and the Banking Regulation Act amended to privatise PSBs. Although getting the amendments passed may not be a problem given the government’s legislative strength, it needs to address a variety of other issues before privatising PSBs.

It is, however, not clear why the government is delaying the process after having announced its intent in the Budget. The names of two PSBs that will be put on the block have also not been made public. The government would do well to start the process soon if it intends to complete it even in the next fiscal year. In terms of specifics, it is being reported that the government will retain 26 per cent stake in the privatised banks. Such issues will need to be handled carefully. The government holding a significant stake could deter potential bidders as it would leave the scope for interference in management. This would also mean that the government will be able to influence appointments, which will defeat the purpose of privatisation. 

One of the reasons why PSBs have suffered over the years is their inability to hire talent for specialised positions due to constraints related to the public sector. Since there are also regulatory constraints in terms of equity holdings in banks, what the government can perhaps do is to put out a clear road map for reducing its stake over a period of time. This would provide clarity to potential investors. The government will also need to address the concerns of existing employees of these banks. Bank employee unions are protesting against privatisation. Addressing this particular issue can take time and the government will need to provide exit options to those not willing to work after the ownership change. 

The need for reducing the government’s stake in the banking system cannot be overstated and the government must be commended for having announced its intent to privatise PSBs. They have been a drag on public finances and the government has been borrowing to infuse capital in PSBs. Privatisation will allow these banks to raise growth capital from the market. The management would also be in a position to make decisions freely. Bankers in the public sector are troubled by the fact that their business decisions can be questioned by investigative agencies. At a broader level, the reluctance to take decisions affects the flow of credit in the economy. Thus, there are strong reasons why the government should privatise PSBs. It surely will have to address specific issues such as those related to holdings and human resources. To be fair, it will not be easy for the government to privatise PSBs. But postponing is unlikely to help. It is worth noting that a half-hearted attempt would limit potential gains.