Bank privatization: Indian Overseas Bank & Central Bank of India recommended for privatization

Bank privatization: Indian Overseas Bank & Central Bank of India recommended for privatization

Last updated: 30 Jun, 2021 | 01:29 pm

Bank privatization: Indian Overseas Bank & Central Bank of India recommended for privatization

The Government of India has set an ambitious disinvestment target for FY22 - Rs 1.75 lakh crore. As part of disinvestment, the government aims to privatize two public sector banks (PSBs) and a general insurance company.

Before the start of the exercise, the government had indicated that weaker banks or banks under the Prompt Corrective Action (PCA) framework will be kept out of the privatization process as it would be difficult to find buyers for them.

Earlier NITI Aayog has submitted names of a few public sector banks for disinvestment. Four banks' names were being circulated - Indian Overseas Bank (IOB), Central Bank, Bank of India (BoI), and Bank of Maharashtra. Most of these banks are in good shape, and hence they are the obvious choice for disinvestment. 

Also, a panel is set headed by the cabinet secretary to discuss the various regulatory and administrative issues that could slow the process of PSBs' disinvestment. A proposal is being created to amend any existing rules that are a barrier to the disinvestment process. The high-level panel was set on the recommendation of the NITI Aayog.

In last week's meeting, the two names were proposed for privatization by the committee - the Central Bank of India and the Indian Overseas Bank. The panel set up for smooth transition is currently looking at the protection of interests of workers of banks for these banks.

Once the clearance comes from the panel, the proposal will go to the Union Cabinet headed by the Prime Minister for the final clearance. After cabinet approval, the changes on the regulatory side to facilitate privatization would start. 

Along with privatization, the government is also focusing on a merger of PSBs. In the last four years, a lot of mergers have happened. India currently has 12 public sector banks, down from 27 in 2017. A total of 10 public sector banks were merged last year, effective from 1 April 2020.

INDmoney Analysis:

The government has to continuously infuse capital into the PSB. Once these banks are sold, it will help the government in two ways - the government gets back its capital (for the Rs 1.75 lakh crore target), and second, they don't have to infuse more capital. The value of capital will depend on the market condition and the inherent strength of the banks like the number of branches, customers, business mix, etc. However, it will not be less than the current market cap of the bank.

The investors may benefit in the long run as with new management and fresh capital, banks will be more efficiently managed that will reflect in the future results.

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