Tag: PSBs

NPA hive-off, staff transfers being considered, BFSI News, ET BFSI

Banking & Finance

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The government could hive off the non-performing loans of the two public sector banks that are to be selected for privatisation and transfer some of their employees to other state-run lenders in a bid to make them attractive for buyers.

The government is likely to consider only banks that were not part of the recent consolidation, which would exclude Punjab National Bank, Bank of Baroda, Canara Bank and State Bank of India from the privatisation process. “We could clean up the balance sheet and then offer the bank for sale, if it would get better valuations… All options are open,” a senior government official said.

Finance minister Nirmala Sitharaman said in the budget for FY22 that the government intends to privatise two public sector banks and one state-run general insurer in the next financial year.

The finance ministry is likely to hold discussions with Niti Aayog over the next 10 days to identify the candidates for privatisation.

The government will then begin the groundwork for the process, which will include legal changes and discussions with the Reserve Bank of India on the criteria for potential buyers.

An RBI working group had suggested in November that large corporate houses should be allowed to own banks by amending the Banking Regulation Act.

Workers’ Interest
The interests of employees will also be considered and they could be offered the option to shift to another PSB before privatisation.

Sitharaman told ET in an interview published on February 13 that the interests of all sections including workers would be safeguarded. “We obviously have to negotiate with those bidders to see that the workers’ interests are safeguarded, not just for today but also if the commitment is to ensure that their pensions will be paid, it will be definitely something which I will have to keep in mind… We will have to talk with everybody,” she had said.

Non-consolidation candidates preferred
Banks that were part of the consolidation exercise will be likely be excluded from the privatisation process as they are still managing integration issues and privatising them would add to complexity.

“Consolidation exercise is carried out at various levels including branches, ATMs, people, business, software,” the official said, adding that the process was not complete in some cases because of the disruption caused by Covid-19.

The government announced the merger of 10 public sector banks into four big ones in August 2019, bringing down the number of PSBs in the country to 12 from 27.

Oriental Bank of Commerce and United Bank of India were merged into Punjab National Bank; Syndicate Bank was merged with Canara Bank; Indian Bank with Allahabad Bank, and Union Bank of India with Andhra Bank and Corporation Bank.

Of the 12 PSBS, Indian Overseas Bank, Central Bank of India and UCO Bank are under the RBI’s Prompt Corrective Action framework, a set of guidelines for lenders that become undercapitalised due to poor asset quality or turned vulnerable due to loss of profitability.



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Govt should strengthen PSBs instead of privatisation: AIBEA

Banking & Finance

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The Government should strengthen public sector banks (PSBs) by helping them recover bad loans instead of privatising them, according to the All India Bank Employees’ Association (AIBEA).

“The only problem PSBs facing is bad loans. Most of the bad loans are due to the corporates and rich industrialists,” said CH Venkatachalam, General Secretary, AIBEA, in a statement. He underscored that the Government should support PSBs, take action against the defaulting corporates and industrialists, and not privatise the banks.

“Many private sector banks have collapsed in our country. Last year YES Bank was in trouble, and through eight financial intermediaries, including State Bank of India, that bank was rescued. Recently, Lakshmi Vilas Bank, another private sector bank, got into trouble, and it was given to a foreign bank. Hence, one cannot accept that private sector banks are very efficient,” said Venkatachalam.

The Association General Secretary observed that only public sector banks give loans to common people, poor people, agriculture, small-scale sectors, etc. Private banks help only the big corporates, he alleged. “Public sector banks give permanent jobs to young unemployed. In private banks, it is only contract jobs.”

“Private banks will not open branches in rural areas. Only public sector banks have opened thousands of branches in the villages,” he said. He feared that if PSBs are privatised, rural branches will be closed in the name of cost-saving.

With 75 per cent of total branches in the country, public sector banks have opened 40.50 crore Pradhan Mantri Jan Dhan Yojana (PMJDY) accounts, but private sector banks, with 25 per cent of the total branches, have opened only 1.25 crore PMJDY accounts.

Also read: Govt could raise up to ₹12,800 cr if it divests in 2 PSBs: CARE Ratings

“Total deposits in the banking sector today is 146 lakh crore. This is hard-earned public savings. We cannot allow private hands to play with this huge public savings. Hence privatisation is a bad idea. If the Government is serious about economic development, public sector banks should be strengthened,” he added.

The United Forum of Bank Unions, the umbrella body of nine trade unions in the banking sector, has called for a strike on March 15 and 16 to protest against the Government’s decision to privatise two PSBs.

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Two PSBs, one insurance firm to be privatised

Banking & Finance

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The government is planning to set the ball rolling on privatisation of two public sector banks (PSBs) and a general insurance company in 2021-22.

It also plans to infuse ₹20,000 crore into PSBs to further augment their financial capacity.

“Other than IDBI Bank, we propose to take up the privatisation of two Public Sector Banks and one General Insurance company in the year 2021-22,” said Finance Minister Nirmala Sitharaman in her 2021-22 Union Budget speech.

The Minister said privatisation of the aforementioned entities would require legislative amendments and she proposes to introduce the amendments in this (Budget) Session itself.

IPO of LIC

In 2021-22, the government will also bring the initial public offer (IPO) of the Life Insurance Corporation of India (LIC). For this move, too, the government will bring the requisite amendments in this session itself.

Currently, there are 12 public sector banks (PSBs) and 4 public sector general insurance companies.

In her 2020-21 Union Budget speech, Sitharaman had proposed to sell the balance holding of the government in IDBI Bank to private, retail and institutional investors through the stock exchange. The government and LIC currently hold 45.48 per cent and 49.24 per cent stake, respectively, in IDBI Bank.

Rajkiran Rai G, Chairman, Indian Banks’ Association (IBA), said: “Recapitalisation of Public Sector Banks to the tune of ₹20,000 crore will help the banks to shore up the capital and provides additional room for lending.

“Proposals for the privatisation of two public sector banks and an insurance company are bold reform measures announced in the budget.”

A bold move

Banking expert Hari Hara Mishra observed that the announcement on privatisation of two PSBs is a bold move on financial reforms. It will enhance competitiveness in the banking sector and improve efficiency.

“This will reduce pressure on the government to fund growth capital for these banks. The timing of the move could not have been better as BSE Sensex is near all-time high,” said Mishra.

Banking, insurance and financial services are among the four areas considered strategic by the government. Per the policy features of the “Disinvestment/Strategic Disinvestment Policy”, in strategic sectors, there will be bare minimum presence of the public sector enterprises (PSEs). The remaining Central PSEs in the strategic sector will be privatised or merged or subsidiarized with other CPSEs or closed.

In non-strategic sectors, CPSEs will be privatised, otherwise shall be closed.

Capital infusion so far

Per the Budget document, ₹80,000 crore in 2017-18, ₹1,06,000 crore in 2018-19 and ₹65,443 crore in 2019-20 was infused for the recapitalisation of PSBs.

Further, a provision of ₹20,000 crore was made in 2020-21 for recapitalisation of PSBs.

In the FY 2020-21 so far, ₹5,500 crore has been infused by the government as fresh capital in PSBs through non-interest bearing special securities.

The government has also infused capital through issue of bonds in three other financial intermediaries – IDBI Bank (₹4,557 crore), EXIM Bank (₹5,050 crore) and IIFCL (₹5,297.60 crore).

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Finance ministry looks at holding company for PSB recap, BFSI News, ET BFSI

Banking & Finance

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NEW DELHI: The finance ministry is looking at other avenues for affordable capital infusion, including setting up of a Bank Investment Company (BIC), as the RBI has raised concern over the issuance of zero coupon bonds for recapitalisation of public sector banks (PSBs), sources said.

Setting up BIC as a holding company or a core investment company was suggested by the P J Nayak Committee in its report on ‘Governance of Boards of Banks in India‘.

The report recommended transferring shares of the government in the banks to the BIC which would become the parent holding company of all these banks, as a result of this, all the PSBs would become ‘limited’ banks.

BIC will be autonomous and it will have the power to appoint the board of directors and make other policy decisions about subsidiaries.

The idea of BIC, which will serve as a super holding company, was also discussed at the first Gyan Sangam bankers’ retreat organised in 2014, the sources said. They added that it was proposed that the holding company would look into the capital needs of banks and arrange funds for them without government support.

It would also look at alternative ways of raising capital such as the sale of non-voting shares in a bid to garner affordable capital.

With this in place, the dependence of PSBs on government support would also come down and ease fiscal pressure.

To save interest burden and ease the fiscal pressure, the government decided to issue zero coupon bonds for meeting the capital needs of the banks.

The first test case of the new mechanism was a capital infusion of Rs 5,500 crore into Punjab & Sind Bank by issuing zero-coupon bonds of six different maturities last year. These special securities with tenure of 10-15 years are non-interest bearing and valued at par.

However, the Reserve Bank of India (RBI) expressed concerns over zero-coupon bonds for the recapitalisation of PSBs.

The RBI has raised some issues with regard to calculation of an effective capital infusion made in any bank through this instrument issued at par, the sources said.

Since such bonds usually are non-interest bearing but issued at a deep discount to the face value, it is difficult to ascertain net present value, they added.

As these special bonds are non-interest bearing and issued at par to a bank, it would be an investment, which would not earn any return but rather depreciate with each passing year.

Parliament had in September 2020 approved Rs 20,000 crore to be made available for the recapitalisation of PSBs. Of this, Rs 5,500 crore was issued to Punjab & Sind Bank and the finance ministry will take a call on the remaining Rs 14,500 crore during this quarter.

With mounting capital requirement owing to rising NPAs, the government resorted to recapitalisation bonds with a coupon rate for capital infusion into PSBs during 2017-18 and interest payment to banks for holding such bonds started from the next financial year.

This mechanism helped the government from making capital infusion from its own resources rather utilised banks’ money for the financial assistance.

However, the mechanism had a cost of interest payment towards the recapitalisation bonds for PSBs. During 2018-19, the government paid Rs 5,800.55 crore as interest on such bonds issued to public sector banks for pumping in the capital so that they could meet the regulatory norms under the Basel-III guidelines.

In the subsequent year, according to the official document, the interest payment by the government surged three times to Rs 16,285.99 crore to PSBs as they have been holding these papers.

Under this mechanism, the government issues recapitalisation bonds to a public sector bank which needs capital. The said bank subscribes to the paper against which the government receives the money. Now, the money received goes as equity capital of the bank.

So the government doesn’t have to pay anything from its pocket. However, the money invested by banks in recapitalisation bonds is classified as an investment which earns them an interest.

In all, the government has issued about Rs 2.5 lakh crore recapitalisation in the last three financial years. In the first year, the government issued Rs 80,000 crore recapitalisation bonds, followed by Rs 1.06 lakh crore in 2018-19. During the last financial year, the capital infusion through bonds was Rs 65,443 crore.



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