On PSB privatisation: Avoidable delay

News: Although, the Finance Minister had announced in this year’s Budget that the government will take up the privatisation of two PSBs.

Yet, it unlikely to happen this year.

The Finance Minister, in a written reply to the Parliament, said that the Cabinet has not taken any decision in this regard.

Moreover, the government will need to get the Banking Companies (Acquisition and Transfer of Undertakings) Acts, 1970 and 1980, and the Banking Regulation Act amended to privatise PSBs.

But the Govt must address a variety of other issues before privatising PSBs.

What are some issues that need to be addressed?

Govt’s stake in privatised banks: It is being reported that the government will retain a 26% stake in the privatised banks. The government holding a significant stake could discourage potential bidders, as it would leave the scope for interference in management. This would also mean that the government will be able to influence appointments, which will defeat the purpose of privatisation.

Regulatory constraints: There are also regulatory constraints in terms of equity holdings in banks. These can be addressed by putting out a clear road map for reducing Govt stake over a period of time. This would provide clarity to potential investors.

Concerns of the employees: The Govt will also need to address the concerns of existing employees of these banks. Bank employee unions are protesting against privatisation. Govt will need to provide exit options to those not willing to work after the ownership change.

What is the rationale behind privatisation of PSBs?

There are strong reasons for privatisation of PSBs –

– They have been a burden on public finances and the government has been borrowing to infuse capital in PSBs.

– Privatisation will allow these banks to raise growth capital from the market.

– Bankers in the public sector fear that their business decisions can be questioned by investigative agencies. This reluctance to take decisions affects the flow of credit in the economy. Thus, privatisation will allow the management to make decisions freely.

It will not be easy for the government to privatise PSBs. But postponing is unlikely to help.

Source: This post is based on the article “Avoidable delay” published in Business Standard on 22^nd Dec 2021.