India Shortlists Four Banks for Potential Privatisation – sources

India’s government has shortlisted four mid-sized state-run banks for privatisation, under a new push to sell state assets and shore up government revenues, three government sources said.

Bank of India among four banks shortlisted for potential privatisation
The government is considering mid-sized to small banks for its first round of privatisation to test the waters

Privatisation of the banking sector, which is dominated by state-run behemoths with hundreds of thousands of employees, is politically risky because it could put jobs at risk but Prime Minister Narendra Modi’s administration aims to make a start with second-tier banks.

The report said two of these banks will be selected for sale in the next financial year, 2021-22, starting April. Privatisation of these banking behemoths employing thousands may put jobs at risk, but this would let the government test the waters in the first round before moving on to bigger banks, it added.

The government, however, will continue to hold a majority stake in India’s largest lender State Bank of India, which is seen as a ‘strategic bank’ for implementing initiatives such as expanding rural credit.

A finance ministry spokesman declined to comment on the matter.

Economists say bolder reforms like these were prompted by the unprecedented economic contraction caused by the pandemic besides the heavy load of non-performing assets that are expected to grow once the banks analyze the loans that soured during the pandemic.

They believe the Centre could have mulled of privatising bigger banks like Punjab National Bank or Bank of Baroda since the smaller ones may have few takers due to their bad assets and their sale is unlikely to raise bigger resources.

Modi’s office initially wanted four banks to be put up for sale in the coming fiscal year, but officials have advised caution fearing resistance from unions representing the employees.

New Delhi also wants to overhaul a banking sector reeling under a heavy load of non-performing assets, which are likely to rise further once banks are allowed to categorize loans that soured during the pandemic as bad.

Bank of India has a workforce of about 50,000 and Central Bank of India has 33,000 staff, while Indian Overseas Bank employs 26,000 and Bank of Maharashtra has about 13,000 employees, according to estimates from bank unions.

Bank of Maharashtra’s smaller workforce could make it easier to privatize and therefore potentially one of the first to be sold, the sources said.

On Monday workers started a two-day strike opposing the government’s move to privatize banks and sell stakes in insurance and other companies.

The actual privatisation process may take 5-6 months to start, one of the government sources said.

“Factors like several employees, the pressure of the trade unions, and political repercussions would impact a final decision,” the source said, noting that the privatisation of a particular bank could be subject to change at the last moment due to these factors.

The government hopes that the Reserve Bank of India, the country’s banking regulator, will soon ease lending restrictions on Indian Overseas Bank after an improvement in the lender’s finances that could help its sale.

Some economists said there could be a few takers for weak and small banks – saddled with bad assets – but that Modi should consider the sale of bigger banks like Punjab National Bank or Bank of Baroda. The sale of small banks was unlikely to help the government raise much in the way of resources for budget spending, they said.

“The government should consider what gives it a better pricing without compromising its long-term goal of financing the growing Indian economy,” said Devendra Pant, chief economist at India Ratings, the Indian arm of Fitch rating agency.

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