Thinkpad: Bracing For Impact

Happy Sunday.

Change is coming.

The upcoming session of Parliament has some important business to take up. Apart from the repeal of the farm laws, the Banking Laws (Amendment) Bill has been listed for tabling. Yes, so has the Bill on cryptocurrencies but we'll get to that later.

The contours of the Banking Laws (Amendment) Bill will determine the shape of bank privatisation in India. One route could be to carve out space to privatise just the two banks that Finance Minister Nirmala Sitharaman said they would in the budget earlier this year. That would perhaps be the easier way out. But if the government is intending to slowly reduce its involvement in banking, on the premise that the economy needs less of it now, then a decision to reduce government shareholding to a threshold lower than 51% would be in order.

What should that level be?

Some two decades back, Yashwant Sinha had proposed it at 33%. Press Trust of India reports that this government may bring down the minimum government holding in the PSBs from 51% to 26%.

The discussion won't end there. With the government holding 26%, will strategic investors shy away fearing continued intervention? Will a structure like a Bank Investment Company, proposed by the PJ Nayak Committee help? Maybe, maybe not. Will employees get protection at least for a limited period of time?

While on this subject, we can't help but flag off two slightly older pieces from BloombergQuint.

On the 50th anniversary of bank nationalisation in 2019, we spoke with former RBI Governor YV Reddy. “Banks were nationalised at the whim of a Prime Minister, they will be de-nationalised at the whim of another Prime Minister,” he told us presciently and went on to explain how the role of public sector banks in the economy should be analysed. Much of that conversation is still relevant and you can read it here.

For those who want to refresh their memory on how bank nationalisation came about, veteran bureaucrat and banker DN Ghosh had penned down his memories in this piece.

Moving on.

There were two other noteworthy developments in banking this week.

A review of private bank ownership and corporate structures has been underway at the RBI for about a year. The most contentious issue on the table was whether to open the door to corporate entry into banking, as suggested by an internal working group. The RBI kept that recommendation on hold, sticking to a path chosen by regulator over decades. In doing so, it stayed true to its conservative DNA.

It did however ease up on bank promoters, allowing them to hold up to 26% stake in lenders over the long run. There is logic to this. You can read the entire set of recommendations here.

The resolution of PMC Bank moved a step ahead with the Draft Scheme Of Amalgamation being put out for comments. It was unique in the treatment of depositors, where it has not only staggered out the payout over 10 years but also proposed differential treatment for institutional and retail deposit holders. Can this set a new precedent? Read our piece on that here.

Now, let's come to the cryptocurrency bill, where the noise-to-signal ratio is at a peak.

The bill description suggests it intends a near-complete ban while leaving the door open for a central bank-backed digital currency. Some news reports suggest otherwise. Amid the confusion, local crypto markets saw a selloff, leaving investors nervous and wondering what their options are.

Frankly, we're a little tired of the blind discussion on this subject so we'll wait till the bill is in the public domain before we say anything more.

The week ended with a new round of Covid worries. Reports of a new variant sent markets tumbling. Equity markets corrected and oil prices fell as investors pondered over the “what ifs....”

We leave you with a few interesting corporate reads: Succession planning at the House of Reliance is underway. And at the House of Hindujas, succession isn't going exactly as planned.

Till next week.