Public Sector Banks Privatization

There is a wide discussion amongst policymakers to open up the banking sector via easing norms for corporate and foreign bank participation in acquiring public sector banks that the central Government is looking to privatise, sources with knowledge of the matter told ET Now.

• Presently, industrial houses that have less than 60% of their turn over from non-financial entities are not allowed to apply for bank licences and their equity participation is also limited to 10%, as regulators have feared that this could risk financial stability because of the propensity of the corporates to milk banks for ‘self-loans.’
• It is learnt that the government and the central bank may move with “abundant caution” and will take into account global experience and prior experience as well before taking a decision.
• Greater regulatory vigilance in terms of preferring corporate players with a long term 10-year business plan, “Fit & Proper Criteria” for corporate participation for taking equity in banks, tighter norms for related party transactions could be put in to ensure no excessive concentration or risks to financial stability.
• Policymakers are also discussing allowing foreign banks with Indian subsidiaries to participate in buying government stake when state-owned banks like Central Bank of India, Bank of India, Punjab and Sind Bank, IOB and UCO Bank are privatised.
• The banking sector has been plagued with rising bad loans leading to decline in capital adequacy ratios and in some cases failure. Recently, Yes Bank was saved through government and RBI intervention when SBI lead consortium infused more capital into the private lender to save it from bankruptcy. Last week the government and RBI had to intervene to aid the rescue of Lakshmi Vilas Bank by the Indian subsidiary of DBS Bank, a move that reflected a change in thinking of the central bank and the government.
• Besides DBS, there are only one other foreign bank that has Indian subsidiaries — SBM Bank. SBM Bank (India) Limited (Subsidiary of SBM Group) and DBS Bank India Limited have been issued license on December 6, 2017, and October 4, 2018, respectively for carrying on banking business in India through a wholly-owned subsidiary.

PURPOSE OF WIDENING THIS MOVE

• This move is aimed to buyout public sector banks when the government decides to privatise them will not only increase competition in the sector leading to efficiency but will also make a paradigm shift in the sector. The larger aim is to make Indian banks globally competitive.
• The discussion on this is at early stage but the policy could be timed with the government’s larger privatisation policy that will allow selling of some Indian public sector banks. Bank of India, Central Bank of India, Bank of Maharashtra, Punjab & Sind Bank are some of the state-run lenders that the government is looking to privatise.