Big Decision On Privatisation Of Govt Banks: Critical Laws Will Be Amended For Faster Privatisation

The government will be making amendments to laws in order to move ahead with PSB privatisation. 

To Speed Up Privatisation

Ongoing deliberations are concerned with the repealment of Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980 (nationalisation Acts).

The plan is to amend the concerned laws all at once so that the privatisation process does not face legal obstacles. It is in the midst of inter ministerial consultations

Final legislative action with respect to the aforementioned acts can be expected to take place in the Parliament’s Monsoon session.

Legal Obstacles

A significant constraint that was identified is that non-govt shareholders have a voting rights cap of 10% regardless of their shareholding. 

Another item under review is the stipulation in the Banking Regulation Act, 1949 which states that no shareholder of a public or a private sector bank can exercise more than 26% of their voting rights. 

A more liberal banking system can be achieved when promoters are given higher voting rights. The banks would need to extend themselves and adopt the right governance mechanism. 

All of this would convince the RBI to amend its present stance which seeks to limit promoter control.

Why Govt Is Pushing Privatisation

In this year’s Union Budget speech, Fin. Min. Nirmala Sitharaman had announced the administration’s plan to privatise 2 PSBs and a general insurance co, all part of a larger plan to privatise more PSBs.

This reflected the govt’s attempt to dismantle the stronghold of the public sector and to encourage private players to acquire govt assets.

Privatisation is the need of the hour since even before the pandemic broke out, market capitalisation of the bad loan-saddled PSBs was eroding steadily and substantially.

The situation was bad enough that between FY15 and FY20, the Centre had to intervene by infusing Rs 3.2 lakh crore to shore up the capital base of the affected PSBs.

Selected Candidates

Niti Aayog has selected a few PSBs to be privatised and the RBI and the government are in talks to privatise the two .

Before repealing the bank nationalisation laws the PSBs will have to be transitioned from under these Acts to the Companies Act. 

Other cos have made the transition but none that are nationalised. 

5-6 banks including  Axis Bank, ICICI and IDBI Bank experienced a smooth transition to privatisation, all of which were govt-owned but not nationalised. 

Future of PSBs

The govt has made significant progress by reducing the number of state-run banks from 27 in 2017 to 12 today. 

By cutting down the number, the market is less crowded now with a few strong banks at the top which feed the growing appetite for credit in the economy. 

It helps recover economic growth and cost cutting through greater synergy. 

With the new strategic sector policy the govt will eventually retain 4 state-run banks while others will be merged or privatised. 

Niti Aayog recommended that the govt should retain control over India’s top 4 public lenders  State Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank.

It put forward the smaller PSBs Punjab & Sind Bank, Bank of Maharashtra and Uco Bank to be prioritised for privatisation. 

The govt could amalgamate the remaining 5 PSBs (Bank of India, Union Bank, Indian Overseas Bank, Central Bank and Indian Bank) with the 4 larger ones it may choose to retain. 

Or it could reduce its stakes in the 5 PSBs to 26% before making a complete exit. 

Govt Will Change Banking Laws To Make Privatisation Of PSU Banks Easier, Faster, Seamless, learn more