Niti Aayog bats for major bank consolidation, recommends selling of Uco, BoM, Punjab and Sind Bank

The idea was to create only a few but strong banks to support the rising credit appetite of the economy, help reverse a slide in economic growth and cut costs through greater synergy.

As banking is set to be in the list of ‘strategic sectors’ fit for discretionary privatisation under a new policy being unveiled, the NITI Aayog has prepared a blueprint for the key sector, with consolidation in focus. The think tank has asked the government to retain control over the country’s top four state-run lenders — State Bank of India, Punjab National Bank, Bank of Baroda and Canara Bank, even as it recommended that three small public-sector banks – Punjab & Sind Bank, Bank of Maharashtra and Uco Bank — be privatised on a priority basis.

The government has stated that a maximum of four state-run players will be allowed in each of the ‘strategic sectors’, a list of which will soon be placed before the Cabinet for clearance.

As for the remaining five PSBs (Bank of India, Union Bank, Indian Overseas Bank, Central Bank and Indian Bank), the government may either amalgamate them with the four larger ones it chooses to retain or trim its stake in them over a stipulated time-frame to 26%, before exiting fully, according to the NITI Aayog proposal.

“PSBs may need massive capital infusion once the validity of various regulatory relaxations (the repayment moratorium was over on August 31 and the restructuring of loans is being considered for up to two years) are over,” a source said, highlighting the urgency to privatise most of the PSBs. Privatisation of weak PSBs will save the government the need to infuse capital year after year to keep them afloat.

However, the government will likely have to work out a medium-term plan for the privatisation of PSBs to garner maximum from the sale. Currently, most of the PSB stocks are beaten down and reflect only a fraction of the value they commanded a few years ago.

Between FY15 and FY20, the Centre had to infuse as much as Rs 3.2 lakh crore to shore up the capital base of the bad loan-saddled PSBs. Still, their market capitalisation has eroded steadily and substantially in recent years even before the Covid-19 pandemic hit them.

Sources said for privatising the banks, the government will have to repeal the bank nationalisation Act – the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970. Given the BJP-led NDA’s clout in both the Houses of Parliament, legislative hurdles for any such move seem unlikely.

Former prime minister Indira Gandhi had nationalised 14 private banks in 1970, followed by another six banks in 1980. The Modi-government is trying to unshackle the hold of the public sector by encouraging private players to acquire government assets. Recently, it repealed the law governing BPCL to pave the way for its privatisation (sale process is on). It also plans to amend the Coal Bearing Act to allow commercial coal mining by private firms.

Already, the NDA government has undertaken a series of consolidation exercises in the public-sector banking space. Therefore, the number of state-run banks has come down from 27 in 2017 to 12 now. The idea was to create only a few but strong banks to support the rising credit appetite of the economy, help reverse a slide in economic growth and cut costs through greater synergy.

The government had in August last year announced that Oriental Bank of Commerce and United Bank will be merged into Punjab National Bank to create the country’s largest state-run bank after SBI, with a total business of close to `18 lakh crore. Similarly, Syndicate Bank is amalgamated with Canara Bank, and Andhra Bank and Corporation Bank will be merged into Union Bank. Also, Allahabad Bank will be amalgamated with Indian Bank. Each of the amalgamated entity, created in April, has a business of over Rs 8 lakh crore.