Government has shortlisted these 4 banks for potential privatisation: Bank of Maharashtra, Bank of India, Indian Overseas Bank & Central Bank of India

The Indian economy’s contraction that we witnessed in the last year called in for various measures from the government, mostly relying on the Keynesian approach for the government to directly push money into the economy through fiscal expansion. However, as is seen by the trend from over 5 years under the reign of Modi government, the government has heavily relied on privatisation as their source of income since other revenue sources like tax income took a hit after the economic crisis after demonetisation and introduction of goods and services tax or GST. So, now that the government needs to incur a large amount of expenditure for economy’s revival post the deadly pandemic, it is no surprise that the government has further turned its face towards more privatisation- this time by privatizing the 4 state-run midsized banks, namely Bank of Maharashtra, Bank of India, India overseas bank and Central Bank of India. Even though the news hasn’t been made public as yet, the official sources that conveyed the news to Reuters have confirmed the news and the speculations led to about 10 per cent rally in each of shares’ trade prices earlier this Tuesday.

These banks have there been shortlisted under an attempt to aid government revenues and shore up the push to sell state assets in line with the government’s privatization policies. Even though the privatization process is expected to be completed at the earliest, two of these four mentioned banks are supposed to be selected for sale in the financial year 2021-22, beginning this April. The officials also claimed that the first round of privatization has thus begun with banks ranging from small to middle-sized and are expected to range to large banks of the country in the coming years, as a phase in the government’s privatization agenda. With more than 1,22,000 employees of all the four banks combined, officials fear resistance from worker unions of these employees, and for all the right reasons, since their sale in the coming fiscal year, along with the current employment and labour market, cannot guarantee employment to most of them, let alone all of them. This uncertainty dawning on the employees’ head is alarming, not only for the government but also for common people since a large increase in the unemployed labour ratio would mean lower wages in the labour market too. As a result, the start of this week witnessed the organization of a 2-day strike by the farmer unions in opposition to the government’s move to privatise banks and sell their stake in insurance and in other companies, endangering the livelihood of many.

As a result of this advised caution by the officials, Prime Minister Narendra Modi’s initial willingness to put all four banks for sale in the coming fiscal year was replaced by about two in the coming year. Bank of Maharashtra’s relatively smaller workforce of about 13000 people makes it a potential sale that is likely to be the first in the listed four in the government’s privatization process. However, it is said that the actual process of privatisation could actually take more than 5 months from now to actually begin.

Sources also claimed that the process of privatization of the public sector banks would require amendment of the two legislations namely, The banking companies’ acquisition and transfer of undertakings act of 1970, and the Banking companies’ acquisition and transfer of undertakings act of 1980. These legislatures, in their current form, do not permit the government to complete the process of privatization and would thus, require amendment for completion of the process.  

The government expressed how it hopes the central bank would relax lending restrictions on Indian Overseas bank because, being the country’s banking regulator, the Reserve Bank of India’s easing of the restrictions would help the Indian Overseas Bank to improve the finances that would help in its sale. However, the credit rating agency, India ratings’ chief economist Mr  Davendra Pant expressed his opinion on how the government should keep in mind the bank’s long-term goal of financing the growing Indian economy while considering what gives the bank better prices. Despite starting with second-tier banks, the possibility of abundant political risk that the Narendra Modi led NDA government confronts cannot be ignored with the privatisation of the banking sector that is generally dominated by the state-run giants and employing lakhs of people whose jobs at are stake.

However, various sources claimed the government would continue to hold the majority stake it has in the State Bank of India, India’s largest lender since the bank is seen as the strategic bank for the country. This implies that the government plans on implementing a bank-led initiative like the expansion of rural credit through the State bank of India. While some economists have been critical of the move, some have expressed their support with respect to the economy’s needs and the banking sector’s heavy load of non-performing assets in the state-led banks. The non-performing assets have further driven into losses and some other banks have also joined the list because of the bad loans given during and before the pandemic that was categorised as bad due to the losses incurred by businesses during the contracting economy and declining demand.

Despite the assurance of the move, there are a number of factors that the government would need to take into account before going ahead with privatization, including but not limited to, number of employees, the pressure of trade unions, political repercussions and financial adequacies. Hence, the privatization of a particular bank or the entire move may be subject to change depending on these factors and their aftermath. Experts have also suggested a sale of bigger banks like Bank of Baroda or Punjab National Bank as opposed to these small and midsized banks since most of these are loss ridden and the amount that they may be able to generate might not prove to be sufficient. Nevertheless, the process is a long one and the uncertain events are likely to be high in number, which we’ll witness in the coming months.