Privatisation will reduce fiscal pressure as the Centre has been infusing capital year after year even though market valuation of government-owned banks has shrunk. Many expect a merger with a large private lender to be one of the options.
An RBI-appointed panel, with government representatives, had said that well-run non-banking finance companies (NBFCs), including those owned by corporates, could be allowed to turn into banks. Those with NBFCs that have banking ambitions, like L&T Finance, may be made an offer.
“Other than IDBI Bank, we propose to take up the privatisation of two public sector banks and one general insurance company in the year 2021-22. This would require legislative amendments and I propose to introduce the amendments in this session itself,” the finance minister said in her speech. Since the banks are governed under the bank nationalisation law, an amendment could pave the way for future divestments as well.
Sanjay Joshi, partner and head of financial services advisory at KPMG, said the move will bring greater focus on low performing PSU banks, grant lenders autonomy and result in capital optimisation for the government. “This will also lead to consolidation in the banking and NBFC sector. Now look forward to RBI’s guidelines on ownership of banks,” he said.
Insiders say the government is unlikely to touch the mega PSU banks created out of mergers. The privatisation candidates are likely to be the standalone banks left after the consolidation exercise. Bank of Maharashtra, Bank of India and Indian Overseas Bank have for long been speculated to be on the list.
In the insurance sector, New India Assurance is seen as a candidate as it is already listed and was historically owned by the Tatas. The other three public sector insurers were to be merged, but owing to issues linked to their financial position, the government has put the move on the backburner. Shares of New India jumped 9% to close at Rs 138 on Monday.
Bank unions called it a “bailout operation” for corporate defaulters. “The government, on the one hand, proposes to privatise IDBI and, at the same time, proposes formation of Development Bank for which it has provided Rs 20,000 crore,” said Devidas Tuljapurkar, general secretary of the Maharashtra State Bank Employees Federation. However, bankers cheered the announcement. “Stake sale in public sector companies and financial institutions, including 2 PSBs and one insurance company, in the next fiscal year, is a welcome move,” said Padmaja Chunduru, MD &CEO, Indian Bank.
This is not the first time government has attempted privatisation of PSBs. In 2000, then finance minister Yashwant Sinha announced a plan to bring down government holding to 33%, but it got stalled. Former RBI governor Raghuram Rajan had also suggested that government could experiment with privatising a small PSU bank.
Sarkari support stays for LIC covers
The finance bill has proposed to increase the authorised share capital of Life Insurance Corporation (LIC) to Rs 25,000 crore, comprising 2,500 shares of Rs 10 each. The government has proposed 19 amendments to the LIC Act as a prequel to its initial public offer (IPO). However, it has not touched section 37, which extends a government guarantee to the sum assured under all policies.
The bill proposes to have a separate quota for policyholders who can apply for shares at a discount, which can go up to 10%. Under the proposed amendment, the government stake can go down to 51% with a maximum of three shareholder representatives on the board if the government share falls below 75%, two representatives if it is between 75% and 90%, and one representative if its 90% or more.
In addition to being allowed to issue new shares to the government and other investors, the corporation will be allowed to declare a dividend to shareholders or plough back surplus into reserves.