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The privatisation of India's banks is riddled with difficulties and may be delayed


Analysts predict that India would need to inject extra capital into any state-owned banks it puts on the market to make them appealing to potential buyers and that the country will face obstacles ranging from the need to modify the country's banking laws to unfriendly staff unions. In her February budget address, Finance Minister Nirmala Sitharaman stated that the government intends to sell two public sector banks and conduct an IPO of shares in the Life Insurance Corporation of India in the fiscal year ending 31 March 2022. The sales are meant to make these state-owned enterprises more agile and to assist the government in raising cash to cover its widening fiscal imbalance, which has widened as a result of the COVID-19 epidemic. The names of the two banks that the government intends to sell have not been revealed. However, local media sources have named the Central Bank of India and Indian Overseas Bank as potential possibilities, citing top officials and the suggestions of a government think group. Bank of India is another lender that the government may sell in stages. The proposed transactions are part of the government's efforts to reform the state-controlled banking sector, which has been beset by growing bad loans and profitability issues. As part of its efforts, it executed three rounds of mergers among state banks to make them bigger and better, reducing the overall number of state banks to 12 from 27 in 2017. Given the banks' poor finances, the government continued to infuse money to help them expand their lending, particularly to priority industries that private sector banks generally find less profitable. Anurag Singh Thakur, the then-junior minister for finance, stated in February that the government had put 3.5 trillion rupees in capital into state banks during the previous five years. While the government's precarious fiscal position may not allow for significant recapitalization prior to sale to improve their attractiveness to investors, it could make public sector banks more appealing by resolving the larger bad loans before sale so that investors clearly know what their liabilities would be," said Alok Sheel, the RBI chair professor in macroeconomics at the Indian Council for Research on International Economic Relations, a New Delhi-based think tank.


Prior to a sale, the government will need to modify banking regulations that require it to maintain a minimum 51 percent ownership interest in state-owned banks. While Finance Minister Sitharaman stated that the administration will file legal modifications to allow for privatisation, the legislation has yet to be introduced in Parliament. Opposition political parties and bank employee unions, notably the All India Bank Employees Association, have pledged to fight the idea, citing job security concerns.


The privatization may happen via capital infusion by another state-run company, a bailout led by a foreign bank or a capital infusion by a strategic investor, Jefferies said in a note after the budget announcement. It cited the precedence of the government-owned Life Insurance Corp. taking a majority stake in IDBI Bank Ltd. in 2019. In November 2020, Singapore's DBS Group Holdings Ltd. bought struggling Indian institution The Lakshmi Vilas Bank Ltd. in a deal approved by the central bank. According to Jefferies, asset quality at Indian state-run banks has improved, with the bulk of stressed loans identified, and the institutions are "fairly capitalised." This might help attract investment. "While these banks have lost lending share, many of them have been able to increase retail deposits effectively, especially in the post-COVID era as they benefited owing to risk aversion," Jeff writes. After reporting losses for at least two fiscal years, Indian Overseas Bank turned a profit in the fiscal year ending 31 March, whereas the Central Bank of India has reported losses for the last three. The return on average equity of Indian Overseas Bank increased to 5.04 percent in March from minus 59.05 percent in February, whereas the Central Bank of India's ROAE has been negative for the previous three years. Meanwhile, according to S&P Global Market Intelligence data, the two banks' common equity Tier 1 ratio increased to 12.91 percent and 12.82 percent, respectively, in March, from 8.21 percent and 9.33 percent the previous fiscal year.

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