Nationalisation, consolidation and privatisation

Source: The post is based on an article “Nationalisation, consolidation, and privatisation” published in the Business Standard on 17^th July 2022.

Syllabus: GS3 – Issues and Challenges pertaining to the growth and development of Indian Economy

Relevance: Privatization of Public Sector Banks

News: Recently, the privatisation of the public sector banks (PSBs) and insurance companies was discussed by the Finance Minister of India.

History of Nationalization in India

First round: In 1969, there were 73 commercial banks. But the Government of India nationalized a set of fourteen private banks in India.

Second round of nationalisation: It was executed in 1980 when six more banks were nationalized.

Now there are 78 PSBs, excluding small finance banks and payments banks as well as regional rural banks and local area banks.

The Privatization Plan

Ahead of the privatisation plan, the government consolidated PSBs drive to make the banks bigger and stronger. Following this, the number of PSBs has shrunk from 27 in 2017 to 12 at present.

First, the government committed itself to privatise IDBI Bank. Therefore, the privatisation of the IDBI Bank Ltd. is under process. For example, Life Insurance Corporation of India (LIC) acquired 51% in IDBI Bank. LIC has committed to infuse capital for five years, if required, and dilute its stake to 40% within 12 years etc.

In the Union Budget 2021-22, an announcement was made for privatization of 2 among 12 public sector banks (PSBs).

The government has amended the Banks Nationalisation Act to pave the path for privatisation of the PSBs. It mandates the government to bring down its stake just below 51% of the overall shareholding.

What are the reasons for privatization?

The Prime Minister has said that the government’s job is to care for the poor, ensure food, toilets, houses, and supply of clean drinking water. The government has “no business to be in business”.

What are the issues in the privatization of the PSBs?

Traditionally, the government has been divesting its stake in public sector undertakings to make money but the logic behind privatisation of banks is to stop using public money as a lifeline. However, since 1994, the government has pumped in close to Rs 4.5 trillion in these banks as capital.

The Nationalisation Act confers sweeping controlling powers to the government, which are not available to any other major shareholders.

– It can issue directions to the nationalised banks in the public interest. Technically, it needs to be done after consulting with the Reserve Bank of India but the Department of Financial Services, a finance ministry arm, does this often without keeping the banking regulator in the loop.

– The government has the power to appoint whole-time directors including managing director (MD), non-executive chairman and other members in the board of directors of the PSBs.

The government can supersede the board and even sanction making of regulations

The government has the power to liquidate any bank; and also, its nod is necessary for merger between two public sector banks.

In sum, the government enjoys more powers than a majority stakeholder in the Public Sector Banks. The government acts as the superboard as it possesses both ownership and regulatory powers.

Way Forward

The government needs to make more changes to excite investors about the PSBs as merely bringing down the government stake below 51% may not find any taker for the PSBs.

The government must bring down its holding to at least 26% because any serious investor will be willing to look at PSBs when it will have a say in the affairs of the bank with higher voting rights.

Finally, the government should increase the tenure of the CEOs and EDs beyond 60 years and provide market-linked compensation. For example, in private banks, the CEO’s age has been capped at 70 years. The P J Nayak Committee (2014) has also made similar recommendations.