Privatisation of Small Public Sector Banks in India Expected to Start in 2025

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According to industry experts, the long-pending agenda of privatising some small public sector banks (PSBs) in India may see progress in the fiscal year 2024-25. Chandan Sinha, former executive director of the Reserve Bank of India, mentioned that the privatisation of other banks, similar to the stake sale of IDBI Bank in recent years, could happen this year. Currently, India has 12 state-run banks that collectively control about 60 percent of the banking system’s total assets.

Despite previous promises, the government had put the process of selling its stakes in these banks on hold until the 2024 Lok Sabha elections. In the 2020 budget, the finance minister, Nirmala Sitharaman, had expressed the government’s intention to privatise at least two banks and one insurance company. However, this plan remained on paper.

Given the pending nature of this agenda, industry experts believe that the government may actively consider starting the privatisation process with some of the smaller PSBs. A senior PSB executive, who preferred to remain anonymous, highlighted that talk of privatisation has been circulating for a long time, and it is possible that the government will reconsider the issue. Sitharaman, during an event in Mumbai on May 29, confirmed that bank privatisation will proceed as scheduled.

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In 2022, while presenting the budget for 2021-22, Sitharaman had announced the privatisation of PSBs as part of the government’s disinvestment drive to raise Rs 1.75 lakh crore. Since then, the government and the Life Insurance Corporation of India (LIC) have been in the process of selling around 61 percent stake in IDBI Bank. Bids were invited from buyers in October 2022, and by January 2023, the Department of Investment and Public Asset Management (DIPAM) had received several expressions of interest for the IDBI Bank stake. Interested bidders need to obtain approvals from the home ministry for security clearance and the Reserve Bank of India (RBI) to meet the fit and proper criteria. While the IDBI Bank stake sale is ongoing, it is speculated that the privatisation of some other PSBs may be in the pipeline.

When it comes to choosing banks for privatisation, economist Montek Singh Ahluwalia, chairman of the erstwhile Planning Commission, explained that the process typically targets banks that are not performing well. Ahluwalia stated that privatisation seems to be limited to small PSBs that are not doing particularly well.

In March 2024, Arvind Panagariya, chairman of the 16th Finance Commission and former vice chairman of NITI Aayog, India’s apex economic think tank, mentioned during a Business Today event that the privatisation of PSBs should be on the new government’s agenda. Panagariya highlighted that the banks are currently in good health, flourishing, and have solid value, making it an opportune time for privatisation.

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The 12 public sector banks in India are Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab & Sind Bank, Punjab National Bank, State Bank of India, UCO Bank, and Union Bank of India. This count of 12 follows the mega-merger of PSBs initiated in 2019, which consolidated 10 smaller banks into four larger ones.

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