Government May Keep Large State-Owned Banks Under Its Control—BQ Exclusive

Department of financial services wants to retain large PSU banks. Three insurers have been shortlisted for privatisation.

The North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
The North Block of the Central Secretariat building, which houses the Ministries of Finance and Home Affairs, stands in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Indian government may potentially look at privatising as many as six state-owned banks, with an eye on selling stake in smaller-sized lenders.

During deliberations on the new privatisation policy, unveiled by Finance Minister Nirmala Sitharaman in the Union Budget for 2021-22, the department of financial services in the finance ministry said India would need at least six large state-owned banks. India has a total of 12 state-owned banks at present.

“It would be necessary to have at least six public sector banks (five large PSBs in addition to State Bank of India) for meeting the present and future financing needs of the economy,” the DFS said in a submission to the finance ministry’s department of investment and public asset management (DIPAM), in a letter dated Aug. 6, 2020.

BloombergQuint has seen a copy of the correspondence and a draft cabinet note prepared for the new privatisation policy. The submission does not specify the names of these lenders.

While making a case for retaining stakes in large banks, the DFS said the state-owned banks played a unique role in effective and timely financial stability and policy intervention “since the Indian financial system is substantially credit-led rather than market-led".

“This role becomes much more vital during times of financial crises, including in pandemics, for infrastructure funding, rural or semi-urban banking, agricultural credit, MSME or micro-enterprises lending,” the DFS said.

The finance ministry did not respond to an emailed questionnaire.

During her budget speech on Feb. 1, Sitharaman announced the government’s intent to privatise two state-owned banks in the upcoming financial year, without announcing the potential candidates.

In terms of the business size, the top six state-owned banks in India are State Bank of India, Punjab National Bank, Bank of Baroda, Canara Bank, Bank of India and Union Bank of India.

The government has merged 10 state-owned banks into four, which was made effective from April 2020, in a bid to create large banks “with a national presence and global reach". Among the smaller banks, Central Bank of India, Indian Overseas Bank, UCO Bank, Bank of Maharashtra and Punjab and Sind Bank, apart from Bank of India, were left out of the consolidation drive.

The government will bring amendments to two legislations—the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980—in a bid to enable bank privatisation.

State-Owned Insurance Firms

In the insurance sector, the financial services department has listed National Insurance Co., United India Insurance Co. and Oriental Insurance Co. as the candidates for privatisation. “These are wholly government-owned and may be considered a part of the proposed divestment policy,” the DFS said in the letter cited above.

The government also plans to privatise one general insurance company in FY21, according to the finance minister’s budget announcement.

The three insurance companies shortlisted for privatisation by the DFS are the ones that were initially planned to be merged, as a part of the announcement in the Union Budget, 2018-19.

However, in July 2020, the central government decided to reverse its decision. “Given the current scenario, the process of a merger has been ceased so far and instead focus shall be on their solvency and profitable growth, post capital infusion,” the finance ministry had said in a press statement on July 8, 2020.

The DFS was of the view that Life Insurance Corp., New India Assurance Co., and General Insurance Corp. should not be privatised.

Explaining its rationale, the financial services department mentioned that LIC will witness stake sale through an IPO, NIACL, with a market share of over 19%, has around 15% stake held by the public; and GIC is the “sole national insurer” in the reinsurance segment with a public shareholding of 14.2%.

Disinvestment Department’s Response

In the draft note approved by the cabinet on Jan. 27, the disinvestment department gave a point-wise response to various submissions made by ministries and government departments.

In response to the DFS’ letter, the DIPAM asserted that the policy does not give a specific number on the companies that will be privatised but instead has stated that a “bare minimum presence of existing public sector commercial enterprises” will be retained in strategic sectors and the remaining enterprises will be considered for privatisation.

“In-principle” approval from the CCEA [Cabinet Committee on Economic Affairs] for strategic disinvestment of a specific PSE will be obtained from time-to-time, on a case-to-case basis. The timing for specific transactions will, however, be contingent on the considerations of appropriate sequencing, sector trends, feasibility, investors' interest, etc.,” it said.

The New Policy

The privatisation policy, titled ‘New Public Sector Enterprise Policy for Atmanirbhar Bharat’, has placed the banking, insurance, and financial services sector in the strategic sector, among four major categories. The other three sectors include:

  • Atomic energy, space and defence.
  • Transport and telecommunication.
  • Power, petrol coal and other minerals.

While the government will keep limited control over firms falling under the strategic sector list, all other companies in the non-strategic sectors will be considered for privatisation or closure.

The government think tank NITI Aayog will draw up a list of firms that will and will not be privatised in the strategic sectors, which will be taken up for approval by a committee each of secretaries and ministers.