Privatisation is far more difficult than consolidation

Synopsis: The government is looking to privatise the PSBs for strengthening the banking sector. But the Privatisation of PSBs is a complex one.


Recently, the Finance Minister mentioned that India needs more banks to match the scale of the nation’s largest lender, the State Bank of India. This is because India (Asia’s third-largest economy) is shifting to a different plane in the post-pandemic world. India also needs bigger and stronger banks to meet those challenges.

The government is readying to start consultations with the RBI to put in place a framework to screen the potential bidders of public sector banks. The process will start with the strategic divestment of IDBI Bank. But the Privatisation is far more difficult than consolidation of PSBs.

About the consolidation of Banks

The consolidation drive brought down the number of public sector banks(PSBs) 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.

What powers does the government enjoy with PSBs?

The government enjoys more powers than a majority stakeholder should in any board-run company. For example,

i) The government now has the absolute power to appoint the managing director and CEO of a public sector bank and its whole-time directors and non-executive chairman

ii) The government has the power to liquidate any bank and also for the merger of public sector banks.

iii) Under Section 8 of the Bank Nationalisation Act, the government can issue directives to the banks in the public interest after consulting with the Reserve Bank of India (RBI).

Note: Department of Financial Services, an arm of the finance ministry, does this often without keeping the RBI in the loop.

Is divestment of PSB can lead to Privatisation of PSB?

No, Privatisation is very different from divestment. Divestment doesn’t necessarily bring the government stake below 51%. The government divests its stake in public sector undertakings to make money.

Since 1994, the government has pumped in Rs 4.51 trillion in PSBs as capital. Over the years, the government stake in many banks has been rising. For example, the government is having a 97.70% stake in Punjab & Sind Bank and 62.93% in Canara Bank. In the latest Budget also has announced Rs 20,000 crore recapitalisation in the current year.

What are the challenges in Privatising PSBs?

To pave the path for privatisation, the Bank Nationalisation Act has to be amended.

Further, the government stake needs to come down below 51%. This will ensure that the government will stop using public money to keep them alive.

Privatising the PSBs is different from other Privatisation drives. Banks can not be sold to the highest bidder, the profile of the bidder is the most important criterion for a licence to the bank. So, the potential buyers will have to meet the RBI’s fit-and-proper criteria.

In conclusion, merely bringing down the government stake below 51% will not excite the prospective bidders unless the governance norms are overhauled.

Source: This post is based on the article “Privatisation is far more difficult than consolidation” published in Business Standard on 11th Oct 2021.

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