1. The government is planning to gradually privatise some public sector banks (PSBs) by bringing down the Centre's stake in these banks to 33%, says a report, citing government sources. As a first step, the government will form a Bank Investment Company, which will replace the proposed Bank Boards Bureau (BBBs).
2. Bank nationalisation took place to make the shift from class banking to mass banking, and make inroads into rural areas. The lopsided banking was visible in the fact that in 1969 over 40 per cent of our GDP was coming from agriculture, but total loans to the agriculture sector was only 0.2 per cent. Capital was under the control of a minuscule percentage of the population.
3. Privatisation is definitely on the agenda, else they would not have talked about the Bank Investment Company, requesting anonymity. Recently, the government proposed to set up BBBs, which will be responsible for appointing directors in state-run banks and assist them in fund-raising plans. The Bureau will become operational from 1 April, 2016.
4. The formation of the Bank Investment Company necessitates annulling the Bank Nationalisation Acts of 1970 and 1980, the SBI Act and the SBI (Subsidiary Banks) Act. It is a staged way of going about privatisation. That is how govt. is building support. It is not going to be easy to have it passed by the Rajya Sabha.
5. The investment company, however, will be controlled by the Central government. They will still control the Bank Investment Company, but it need not control 51 per cent in public sector banks. Rather it could control 33 per cent, In addition, the public sector banks have to be incorporated under the Companies Act. An idea of forming a holding company for public sector banks was proposed by former finance minister Pranab Mukherjee in 2012 to address their capital needs.
6. A Reserve Bank of India (RBI) panel set up to review governance of bank boards has suggested that the government should either privatize or merge state-run banks, or design a new governance structure for these banks to allow them to compete better and avoid repeated requests for recapitalization.
7. The panel suggested privatization or a different governance structure in view of the low productivity and steep erosion in asset quality and “demonstrated uncompetitiveness of public sector banks over varying time periods.
8. The panel, headed by former Axis Bank Ltd chairman and Morgan Stanley India head P.J. Nayak, has also suggested significant changes in the shareholding pattern of banks. The panel suggested that the RBI should designate a specific category of investors in banks known as authorized bank investors (ABI), who would be allowed to hold as much as 20% in banks without regulatory approval. Such investors would include funds with diversified investors.
9. ABIs would therefore include pension funds, provident funds, long-only mutual funds, long-short hedge funds, exchange-traded funds and private equity funds (including sovereign wealth funds) provided they are diversified, discretionally managed and found to be ‘fit and proper’, according to the pannel's observation, adding that the investor would be allowed to hold 20% provided that it does not possess the right to appoint a board director.
10. Various strategies have been used across the world for privatization of banks. These include sale to a strategic investor, initial public offerings (IPOs), voucher system, and sale toemployees. India followed the strategy of IPOs,which was similar to that followed in the privatization of Bank Slaski in Poland, where it did not succeed.
11. The lessons that follow from India’s bank privatisation experiment are worth noting. In India, the supporting infrastructure like well-developed financial markets (as explained above), a suitable legislative framework, and a sound prudential supervision system (establishment of Banking Ombudsman, establishment of debt recovery tribunals, establishment of an independent Board for Financial Supervision, introduction of CAMELS7 system, etc.) were brought in place alongside bank privatization.
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