Challenges in privatisation of PSBs

Public sector banks (PSBs) are going through a difficult time. They are facing tough competition from foreign and private sector banks. They are piling up huge non-performing assets (NPAs) every quarter due to a liberal credit policy. The Gross Non Performing Advances (GNPAs) in public sector banks was pegged at Rs 6.09 trillion at the end of September 2020. As per the financial stability report 2021 of the Reserve Bank of India (RBI), the GNPA ratio may be raised to 16.2 percent by September 2021.

The NPAs have eroded the PSBs capital and restricted their ability to lend, resulting in a heavy decline in share prices. The standing committee on finance, led by Veerappa Moily, also showed its concern over the issue of high loan write-offs and the NPAs. The committee said that high loan write-offs and the NPAs combined with low assets growth is more severe for the PSBs rather than private banks.

The higher number of the NPAs have reduced the PSBs earning and now they are incurring losses. A few of them are unable to maintain capital adequacy norm. As per Basel norms, they have to maintain a certain amount of capital reserves. The government being the shareholder, is infusing capital into the PSBs. The government had made a provision of Rs 0.20 lakh-crore for recapitalisation for FY22. But it required more money and because of the pandemic, the government is not in the position to infuse more money.

In this line, in Budget 2021, the government announced its privatisation policy, which covers not only for the CPSUs and insurance companies, but also the PSBs. Finance Minister Nirmala Sitharaman proposed to take-up the privatisation of two public sector banks along with the IDBI Bank in the next fiscal.

The NITI Aayog, tasked with preparing a list for privatising banks, has prepared a list and kept the PSBs that were part of the consolidation and the State Bank of India out of this list. In August 2019, the government merged 10 PSBs into four, and brought down their number to 12 from 27.

Meanwhile, the government has accelerated the divestment of four public sector banks — Punjab and Sind Bank, Bank of Maharashtra, UCO Bank, and IDBI Bank. The government is set to invite bids early next year from private players. However, this move is facing stiff resistance from bank unions and opposition parties. On March 15 and 16, under the umbrella of United Forum of Bank Union, nine bank unions went on a nationwide two-day strike against the government initiative.

The PSBs are regulated by the RBI, which also fixes priority sector lending, with no government involvement. Given this, the fall of government stake below 51 percent would not lead to any dilution of its control over the PSBs. The 1991 Narasimham committee also suggested bringing down government equity to 33 percent.

This, however, goes against the public sentiments regarding PSBs—and also reflects a larger suspicion with which private banks are viewed. To counter such sentiments, the government should introduce the golden share concept to ensure it remains public sector banks. The golden share would be helpful for the government to achieve its twin objectives of recapitalisation of PSBs without losing control over them. The golden share will have the right to veto any board resolution. With this, the government can divest more than 51 percent shares in the PSBs and still retain control.

This concept was very popular during the 1980s when the British government started privatisation and wanted to retain control over them. Governments in Europe, the Soviet Union and Brazil used this concept. In India this concept was mooted by Yashwant Sinha when he was Union finance minister. In 2006, the Congress-led United Progressive Alliance government was also considering to opt the golden share concept. But it was opposed by Left parties and the government missed the boat.