Privatisation of banks

There is a report that the government plans to cut its stake in some public sector banks (PSBs) to 33 per cent in phases. It was former RBI Governor M. Narasimham who had first suggested this in 1998 largely for meeting capital requirements of banks. Though the proposal was accepted by Finance Minister Yashwant Sinha of the NDA government, political opposition did not allow its implementation. Last year the PJ Nayak Committee also recommended that the government should dilute its stake in banks to below 50 per cent. Given the political stalemate over reforms and strong opposition from bankers' unions, it is unlikely that bank privatisation would happen easily. 

After the land Bill fiasco the Modi government may not do anything that arouses public ire, that too ahead of state elections. Nonetheless, the government has its compulsions.  To meet the Basel-III norms from 2017-18 the banks require huge capital infusion. The stake sale idea is being toyed with just to raise money for this purpose. But time is not ripe for this. Given their poor performance and a pile of bad loans, government banks command low valuations in the stock markets and any stake dilution at the current prices would be inadvisable. To get a fair price, their functioning should be improved first, which is easier said than done.  

As part of the bank reforms announced recently, the government plans to set up a Bank Investment Company (BIC), which will acquire the government stakes in its banks. The BIC can dilute its stake in a government bank up to 33 per cent and still retain its control. So it may be privatisation without private control of the management. For this the PSBs will have to be incorporated under the Companies Act and the Bank Nationalisation Act as well as the SBI Act will have to be repealed. But these legislative changes are not possible unless the government is able to secure cooperation from the Opposition. The art of politics is to induce one's rivals to find a way out of the stalemate. The Modi government has its task cut out.