Privatisation is far more difficult than consolidation
For public sector banks, the government is the superboard, with both ownership and regulatory powers under its belt. Is it ready to give up these powers?
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After five decades of bank nationalisation, the government, as the majority owner of a large part of the banking system, must decide on whether to run the banks as an agency for social good or a commercial entity
India needs more banks to match the scale of the nation’s largest lender, the State Bank of India. Finance Minister Nirmala Sitharaman reiterated this last month at the annual general meeting of premier bankers’ body, the Indian Banks’ Association (IBA). Asia’s third largest economy is shifting to a different plane in the post-pandemic world. There are many new challenges. We don’t need just more, but bigger and stronger banks to meet those challenges.
This was the logic behind the consolidation drive, which has brought down the number of public sector banks from 27 to 12 in three years between 2017 and 2020. Yet, the State Bank is the lone India representative in the list of 50 largest banks globally. When it comes to size, Chinese banks take the cake. ICBC, China Construction Bank, Agricultural Bank of China and Bank of China top the list. JPMorgan Chase, the biggest in the US, is the fifth largest, followed by its peer, Bank of America.
At the IBA meeting, Sitharaman did not speak about privatisation of banks but there is no end to the speculation on this ever since the finance minister, in her February Budget speech, said: “Other than IDBI Bank, we propose to take up the privatisation of two public sector banks and one general insurance company in the year 2021-22. This would require legislative amendments, and I propose to introduce the amendments in this session itself.”
Life Insurance Corporation of India (LIC) acquired 51 per cent in IDBI Bank in 2019. Since then, its stake has come down to 49.24 per cent, as the bank’s equity has expanded. The government owns 45.48 per cent in the bank. Even though LIC is wholly owned by the government, IDBI Bank is a private bank, governed by the Companies Act, 2013. LIC has committed to infuse capital for five years, if required, and dilute its stake to 40 per cent within 12 years.
(However, in line with the Insurance Regulatory and Development Authority of India’s mandate, LIC will reduce its stake in the bank below 15 per cent and cede management control earlier than what was envisaged.)
Jammu & Kashmir Bank Ltd is close to 75 per cent owned by the state government and yet it is a private bank. Similarly, India Post Payments Bank Ltd, wholly owned by the Government of India, is a private entity under the Companies Act. The Nainital Bank Ltd, 98 per cent owned by public sector Bank of Baroda, too is a private bank.
The key to the public sector character of a bank is a clause in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (popularly known as Bank Nationalisation Act), which does not require the government to pare its stake in such a bank below 51 per cent. The State Bank is governed by a different Act; the floor for the government stake in the bank is 55 per cent. Currently, it is 56.92 per cent.
This was the logic behind the consolidation drive, which has brought down the number of public sector banks from 27 to 12 in three years between 2017 and 2020. Yet, the State Bank is the lone India representative in the list of 50 largest banks globally. When it comes to size, Chinese banks take the cake. ICBC, China Construction Bank, Agricultural Bank of China and Bank of China top the list. JPMorgan Chase, the biggest in the US, is the fifth largest, followed by its peer, Bank of America.
At the IBA meeting, Sitharaman did not speak about privatisation of banks but there is no end to the speculation on this ever since the finance minister, in her February Budget speech, said: “Other than IDBI Bank, we propose to take up the privatisation of two public sector banks and one general insurance company in the year 2021-22. This would require legislative amendments, and I propose to introduce the amendments in this session itself.”
Life Insurance Corporation of India (LIC) acquired 51 per cent in IDBI Bank in 2019. Since then, its stake has come down to 49.24 per cent, as the bank’s equity has expanded. The government owns 45.48 per cent in the bank. Even though LIC is wholly owned by the government, IDBI Bank is a private bank, governed by the Companies Act, 2013. LIC has committed to infuse capital for five years, if required, and dilute its stake to 40 per cent within 12 years.
(However, in line with the Insurance Regulatory and Development Authority of India’s mandate, LIC will reduce its stake in the bank below 15 per cent and cede management control earlier than what was envisaged.)
Jammu & Kashmir Bank Ltd is close to 75 per cent owned by the state government and yet it is a private bank. Similarly, India Post Payments Bank Ltd, wholly owned by the Government of India, is a private entity under the Companies Act. The Nainital Bank Ltd, 98 per cent owned by public sector Bank of Baroda, too is a private bank.
The key to the public sector character of a bank is a clause in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (popularly known as Bank Nationalisation Act), which does not require the government to pare its stake in such a bank below 51 per cent. The State Bank is governed by a different Act; the floor for the government stake in the bank is 55 per cent. Currently, it is 56.92 per cent.
To pave the path for privatisation, the Bank Nationalisation Act has to be amended. The government stake needs to come down below 51 per cent. There are many other changes that need to be done
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
Topics : Nirmala Sitharaman privatisation Banking sector sbi