Disinvestment of state-owned banks
The government has drawn a list of four PSU banks, namely, Punjab & Sind Bank, Bank of Maharashtra, UCO Bank, and IDBI Bank, in which it directly or indirectly holds majority stakes, and wants to disinvest equity.
In recent years, the Indian banking system has seen many mergers and acquisitions:
• In March 2020, the Union Cabinet had approved the merger of 10 public sector banks into four, paving the way for the largest consolidation among state-owned lenders.
o Punjab National Bank took over the Oriental Bank of Commerce and the United Bank;
o Canara Bank took over Syndicate Bank;
o Union Bank of India took over Andhra Bank and Corporation Bank;
o Indian Bank was to be merged with Allahabad Bank.
• In 2018, it was decided to merge Bank of Baroda with Vijaya Bank and Dena Bank.
• The government also allowed Life Insurance Corporation of India to take over 51 percent equity of IDBI Bank Ltd.
• In 2017, five associate banks and BhartiyaMahila Bank were merged into State Bank of India.
India is looking to privatize 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.
The government is working on a privatization plan to help to raise money by selling assets in non-core companies and sectors when the country is strapped for funds due to lack of economic growth caused by the coronavirus pandemic.
Several government committees and the Reserve Bank of India have recommended that India should have not more than five state-owned banks.
The union government has stated that it is considering designating the banking sector as a strategic under the new privatization policy- announced as a part of the ‘Atmanirbhar Bharat’ package.
Benefits of disinvestment
Non-performing assets (NPAs): The majority of the non-performing assets lies in the public sector banks.
Need of time: Indian economy is suffering a lot due to COVID-19 crisis and the governmentneeds funds for that and disinvestment could help a lot.
Autonomy: Due to government interference in PSUs board appointments (as the Bank Bureau board is not fully functional) creates an issue of politicization and interference in the normal functioning of Banks which can be solved by disinvestments.
Reducing inequality: There is a major difference between the incentives of public and private sectors banks. Also there is a huge gap between approaches of two types of banks which can be reduced by disinvestment.
Issues with disinvestment of PSBs
Unfavourable market conditions: Banks may face rising bad loans later this financial year because of the fallout from the Covid-19 crisis. India expects bad loans at its banks could double after the crisis brought the economy to a standstill. Indian banks already had 9.35 trillion rupees ($124.38 billion) of soured loans, equivalent to about 9.1% of their total assets at the end of September 2019.
Governance Issues: Private Banks are prone to malpractices in the wake of serving the interest of its promoters.
Regulation Issues: RBI control on Private Banks is not at par with PSBs as RBI the power to revoke a banking license, merge a bank, shut down a bank, or penalize the board of directors which is not true for private banks.
Social justice: Unlike private banks, PSBs through their welfare policies like farm loan waiver, education loan, financial inclusion etc. act as an instrument for social justice.
Though privation of PSBs can help the government in this time of crisis but also the public in general need PSBs for welfare schemes in this time too. So the government must make a good judgment of the value of the company it decides to disinvest from and if the market conditions are not favourable for the move it must wait for the opportune moment. In fact, in this time of crisis the government should pump money into its state-owned banks and when they plan to disinvest PSBs then the money received must be utilized strictly for new asset creation only.