This blog is authored by Aayush Akar, a third-year law student pursuing BA.LLB(Hons) from National Law University Odisha & Gaurav Gupta a third-year law student from Amity Law School, Noida.
It is for the first time, since the nationalisation of government-owned banks in 1969, that after 50 years, privatisation of banking institutions in India started in August 2019. This is when the Indian government had announced the national merger of almost 10 public sector banks (PSB’s) into four main banks resulting in the number of PSB being 12 from earlier 27. Experts predict that the smaller and the middle-level banks are the ones that are going to be privatised by the government according to their privatisation of banking institutions plan and big banks like SBI and PNB will remain untouched.
In the financial year 2019-20, the government had successfully sold a majority stake of IDBI Bank Ltd. to Life Insurance Corporation of India, leading in effectively privatising the lender in the market. It should be noted that it is for the first time in Indian history in 2019, the Finance Minister Nirmala Sitharaman has used the term ‘privatisation’ in a budget speech. This is by far the most relevant and significant announcement by the government, giving an idea of the shape of the things which will play a major part in the Indian economy in the coming days, months and years.
In its 2021 budget announcement, the Government had put forward its intention to initiate a large scale process through which privatisation of public sector banks (PSBs) will continue in the country. The Finance Minister Nirmala Sitharaman announced in the 2021 budget speech that the government has decided to dispossess its stake in two public sector banks, apart from one of the general insurance company. Additionally, the disinvestment process which has been previously started by the government to dispossess its stake in IDBI Bank will be completed in the next fiscal year.
Why privatisation of banking institutions is needed in indian economy
There are certain obvious challenges faced by the PSB’s in the Indian market, the major ones being political interference, poor supervision and instability in regulatory bodies. The government has injected a lot of capital into PSB’s but haven’t seen any significant change.
For overcoming such challenges, the decision of privatising Public Sector Banks (PSB’s) comes as part of the government’s decision of mergers in the banking sector. Therefore, the government is planning to follow up on its disinvestment plan and meet its decided targets to raise money and bring major changes in banking institutions by bringing private bodies to handle them.
The Reserve Bank of India (RBI) in its trend and progress report and summary of December 2020, had specifically mentioned that the merger of the banking entities can now lead to big and major benefits of the union. The Finance Minister had announced in her 2021 budget speech that the government is planning to raise a sum of (at least) Rs 20,000 crore recapitalisation of PSU banks. The government expects that it will raise a sum of Rs 1 lakh crore after following the disinvestment plan in public sector banks and financial institutions in Financial Year 2021-22. The Budget for the financial year 2021-22 has put forward a sum of Rs 1.75 lakh crore as the main target of the government for all kinds of sale of stakes in public sector companies and financial institutions present in the Indian market which are not the major players and needs a lot of governmental support for survival. According to the finance minister, the government is aiming at making use of disinvestment proceeds to finance various developmental plans of the government, social sector and developmental programmes by using private capital, technology and best management practices.
Governments plan for privatisation of banking institutions
On Feb. 1, 2021, the Union Finance Minister Nirmala Sitharaman said during her budget speech that the government is planning to bring all the necessary legislative changes and introduce appropriate amendments in this Parliamentary session to enable these disinvestment plans, though she did not specifically mention which banks the government was planning to sell its stakes in, or how much would the government divest. Stating in her budget speech that with the exception of four major strategic areas, the public sector companies in other sectors will also be disinvested upon which further planning and discussion is going on in various governmental departments. The new governmental policy would give a clear indication of the government’s roadmap for disinvestment in the strategic and non-strategic sectors. Whereas the Financial Minister did not mention the names of the two banks, the government is planning to privatise according to her Budget 2021 speech, but various analysts point out that the Bank of Baroda (BOB) and the Punjab National Bank (PNB) are possible candidates which could go through such privatisation.
NITI Aayog has been instructed to work on the list of the next set of central owned public sector companies for the strategic disinvestment process. The Finance Minister informed the people in an interview that the government is planning to bring necessary legislative amendments for the process of the PSB’s privatisation which was introduced by her in the current budget session of the Parliament of India as the announcement by the Finance Minister regarding the selling off a couple of PSU banks to the private sector, holds great challenges for the government as, choosing which two public sector banks for privatisation is a tough task keeping in mind that only 12 PSB’s remain as of this date
Necessary legislative amendments required
For providing legal and well-planned support to the privatisation process of public sector banks, the government aims to bring all necessary amendments to two legislations in the coming years. Experts say that the Amendments might be required in the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 for privatisation. The government has already made it clear in its announcement, the list of legislation which it will be focusing on in its Budget session.
It aims to introduce these amendments in the Monsoon session or later during this year. The Budget session which is ongoing in the Parliament of India is planned to take up as many as 38 Bills which includes the National Bank for Financing Infrastructure and Development (NaBFID) Bill, 2021, Supplementary Demands for Grants for 2020-21, Finance Bill 2021, and related Appropriation Bill, and Cryptocurrency and Regulation of Official Digital Currency Bill, 2021. The government is also planning to work with the Reserve Bank for the easy execution of the bank privatisation plan which was announced in the Union Budget 2021-22.
The privatisation of banking institutions in India was given a push by the Indian government in its 2021 budget speech which introduced in the Parliament of India by the finance minister. The said budget is unique in its own ways. This is a kind of budget which the country has seen for the first time as it holds various new changes in different sectors of the Indian economy which the country didn’t expect.
The major focus point of the 2021 budget speech is the government’s plan and decision for the privatisation of two PSB’s which will lead to giving a boost in the banking sector and providing the government with sufficient funds for infrastructural development and help the government in the execution of various development plans and projects. Privatisation of banking institutions is the need of the hour in the Indian banking sector as the working and development in PSB’s regardless of how much government invests in it, will always be less as compared to the amount invested by the government. This money invested in low performing PSB’s could be used for better purposes and might give better output there and there is no denying the fact about how well the private sector works in every field fearing the competition and being supported by a large number of private funds.
By the process of privatisation of PSB’s government aims at raising a huge amount of money which they intend to use for better developmental purposes. Thus, proving that privatisation of banking institutions will turn out to be a beneficiary step taken by the government of India for bringing major changes in the banking sector and giving a boost to the Indian economy.