Government Plans to Reduce Stake in Four Public Sector Banks

The Central Government is considering reducing its shareholding in four public sector banks (PSBs) to 75% to meet the minimum public shareholding rules set by the stock market regulator. The four banks are Central Bank of India, UCO Bank, Punjab & Sind Bank and Indian Overseas Bank. The government is also preparing a plan for the next round of public sector bank consolidation, which could identify two more banks for privatisation, according to people familiar with the matter.

Government’s Plan for Bank Privatisation

In the Union Budget for 2021-22, the government announced plans to privatise two public sector banks and one general insurance company, apart from IDBI Bank. Earlier this month, the government announced that Fairfax Financial Holdings, promoted by Canadian billionaire Prem Watsa, would acquire a 60.72% stake in IDBI Bank for Rs 52,878 crore. In the long term, the government’s aim is to have three to four large public sector banks in the country.

Central Bank of India and Indian Overseas Bank May Be Considered for Privatisation

NITI Aayog had reportedly shortlisted Central Bank of India and Indian Overseas Bank as possible candidates for privatisation. However, the government is also examining the future structure of public sector banks as part of its broader consolidation plan.

Government to Reduce Stake in Four Banks

According to a government official, the first step is to increase public shareholding in the four banks over the next year. The banks may raise funds from the market based on their own plans, while the government may sell part of its stake through an Offer for Sale (OFS). The timing and size of the government’s stake sale will depend on market conditions.

Increasing public shareholding is also expected to improve the market valuation of these banks.

Government Plans to Create Three to Four Large Banks

The government aims to build three to four large public sector banks. Suggestions for consolidation may come from the banks themselves after considering factors such as technology compatibility, geographical presence and the mix of their businesses. These factors will also be considered when evaluating privatisation proposals.

Changes in Banking Laws May Be Required

The government may need to amend existing laws to carry out the privatisation of public sector banks. These changes could include amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act. The government may take up these legal changes alongside the bank consolidation process.