GoI's getaway car from public banks

GoI is contemplating a complete exit from banking through amendments enabling legislation for its stake to fall below 51% in public sector banks (PSBs). Amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, which was listed for introduction in the winter session of Parliament in 2021, are likely to be tabled in the upcoming monsoon session, and could contain a clause that permits GoI to shed its stakes in state-owned banks below 26%. This follows Nirmala Sitharaman‘s announcement in the 2021-22 budget that two PSBs and a general insurer would be privatised. The delay in altering the legal framework to actualise this intent provides an indication of the resistance to change involved in the government’s effort to pull out of banking.

Privatisation has reached the legislative agenda after a painful decade for state-owned banks that saw their activities frozen by regulations due to mounting bad debts. The subsequent clean-up of bank balance sheets, accomplished with taxpayer money, was followed by a wave of consolidation that merged PSBs with healthy bottom lines with weaker rivals. Now that GoI has a bunch of banks it can take to market, changes to the law that would allow its shareholding to fall up to 26% was a necessary condition for their divestment. In the event, it is going a step beyond to allow the holdings to fall even further.

This will harmonise ownership structures for PSBs and private banks, but critically allows the government an eventual exit route from the business. Much of the stress in the Indian banking system has been identified as arising from government ownership. Regulation has been fractured with the Reserve Bank of India (RBI) having a lower degree of oversight over state-owned banks. Governance has suffered due to political intervention and inadequate managerial remuneration has affected risk assessment. New investors will be justified in seeking improvements on all these counts. By introducing the exit clause, the government is showing it is sensitive to these concerns.

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