Modi wants to undo a 51-year-old legacy

New Delhi | Mumbai: The government has taken baby steps toward privatising one or more state-run banks to make them stronger, likely undoing a legacy that started with the nationalisation of banks in 1969, said three people familiar with the plans.A select group of top government functionaries has begun discussions on the proposal that originated from state-backed think tank Niti Aayog that’s aimed at halting future bailouts by the taxpayer, said the people, who did not want to be identified.Possible candidates could include Punjab & Sind Bank, Bank of Maharashtra and Indian Overseas Bank, which are not part of the ongoing consolidation plan.Niti Aayog is said to have advised the government to allow “long-term private capital” into the banking sector. It has also suggested giving banking licences to select industrial houses with the caveat that they don’t lend to group firms.The proposal has been debated at the highest levels of the government, multiple sources said.“There have been some discussions on the de-nationalisation of some banks, but there has been no decision on it yet,” said one of the persons. “The discussions have to get more intense as the Bank Nationalisation Act has to be amended before going ahead with the next step.” 76166474Reserve Bank of India (RBI) guidelines for on-tap universal banking licences allow large industrial houses to invest up to 10% but do not qualify as “eligible entities” to run banks.State-run bank ownership and administration are governed by the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970.Finance minister Nirmala Sitharaman had last month announced the government’s intent to open up all segments of industry, including strategic sectors, to private capital. State-owned companies in any sector would number four at the most, she had said.PUSHING REFORMSPM Narendra Modi’s government has been pushing reforms in the past few months — some that were already on its agenda and others sparked by the Covid-19 outbreak and ensuing lockdown. It has lowered the corporate tax rate to the lowest in the region at 15%, scrapped restrictive laws that prevented smooth movement of farm products and announced strategic stake sales in some firms such as Bharat Petroleum Corp and Shipping Corp of India.Niti Aayog and the RBI did not respond to ET’s queries.Given that nearly Rs 3 lakh crore of investment in state-run banks in the past few years has been used to provide for bad loans rather than extending credit, the stretched finances of the government have prompted policymakers to consider the sale of some lenders. Bank of America has estimated the central government’s fiscal deficit at 6.3% of GDP this year as revenue plummets.“After the bank mergers there are some small banks such as Bank of Maharashtra, Punjab & Sind Bank that are left,” said one of the persons. “Of course, it is also a political issue which the decisionmakers have to factor in.”The plans are at a preliminary stage and there could be many stumbling blocks before it moves forward.BAD LOANS MAY CLIMBCapital demand is set to surge as bad loans may climb quickly once the extended moratorium, aimed at helping borrowers hit by the Covid crisis, is lifted on August 31. State-owned banks may need as much as $13 billion in capital, estimates Credit Suisse, an investment bank.The Modi administration has been struggling with the state-run bank issue ever since it came to power in 2014. An asset quality review called by the RBI had revealed the extent of bad loans on banks’ books. Stressed assets surged past 10% and the RBI imposed Prompt Corrective Action (PCA) guidelines on many public sector banks, crippling lending.Eleven state-owned banks were under PCA prior to January 2019. Capital infusion enabled five of them to emerge from it and start lending again. The government also announced a consolidation exercise to create fewer, stronger state-run lenders. It first merged Dena Bank and Vijaya Bank with Bank of Baroda, effective April 2019.Another 10 banks are being merged to create bigger ones with regional power and wider customer access. Oriental Bank of Commerce and United Bank of India are being combined with Punjab National Bank to make it the second-largest lender by assets.Syndicate Bank and Canara Bank will merge to create the fourth-largest public sector bank. Andhra Bank and Corporation Bank are being amalgamated with Union Bank of India to make it the fifth biggest state-owned bank. The merger of Allahabad Bank with Indian Bank will create a lender with a strong franchise in the south and east. Furthermore, IDBI Bank was privatised with Life Insurance Corp owning a majority stake, which can be sold to any bidder without parliamentary approval, said the people cited above.

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