The government is moving to amend laws to enable privatisation of banks but the route they take can change the way investors look at all the public sector banks. There are three routes. One, they can amend the bank nationalisation act. Second, they could do away with that act altogether and bring banks under the Companies Act. Third, they can create a holding company under which all the PSU banks would be owed.

If they take the first route, again, there are two ways in which they can amend the bank nationalisation act. The law requires that government has to hold 50 percent plus in PSU banks, it can take an exceAll Postsption only for the two banks, which is perhaps Indian Overseas Bank (IOB) and Central Bank of India or it can drop this clause altogether, in which case, there will be a hope that other PSU banks will follow suit for privatisation.

For the second route, if they just do away with a bank Nationalisation Act and bring banks under Companies Act, this could be more reformist because, under the Companies Act, boards have more power. It is the nominations and remuneration committee which appoints the CEO right now. The government appoints the CEO of PSU banks. In the third route, that is creating a holding company then PSU banks, can get even more freedom.

To discuss what would be the route, CNBC-TV18 spoke with SS Mundra, Former Deputy Governor, RBI, and Harsh Vardhan, Banking Expert.

Mundra said the important thing is that what would be the model for privatisation in the long run - legislation is one part of it.

"The banking sector is not a sector where you would not like to do drastic experimentation," he added.

"Privatisation would be needed for two reasons - one is that the bank would be needing the growth capital and the second is bank would be needing an efficiency of a different kind with the emergence of fintech. So, this is the time to look at the various possibilities simultaneously. Fortunately, the groundwork has been created with the consolidation happening with so many other reforms,” said Mundra.

According to him, there are four possibilities and there are candidates available where all the four possibilities can be implemented.

Talking about the four possibilities he said, “One is you already have a case readily available, which is under Companies Act, which is a low hanging fruit. Second, there is a possibility of one of the smaller banks, which were left out of the consolidation to move ahead and bring the ownership below 50 percent because there is a liability franchise with the bank, and ownership of government has a certain impact on the liability franchise. So, you would need to really experiment and see that how these things are going to impact this kind of franchise. So that is the second case.”

“The third case available is where consolidation has already happened and then these entities, in any case, are already 40-45 percent divested in wide ownership. This is a case where the government can think of coming less than 26 percent or below that. The fourth case is because we have a large number of entities and ultimately the idea is to bring the separation of ownership and management. So, the time is ripe that simultaneously the bank holding company, and then a long term roadmap of dilution at the holding company level or entity level can be planned,” he added.

Seconding Mundra's views, Harsh Vardhan said that it should be a broad roadmap.

According to Vardhan, this is just the first step and there has to be a clear roadmap laid out. There are other issues that are going to come up. For example, what kind of entities will be eligible to acquire these banks.

"The issue with the first option which is just amending the Nationalisation Act is that you have to bear in mind that that the 51 percent minimum threshold is just one aspect of the Nationalisation. There are other issues in the Nationalisation Act., for example, suppose government sells 51 percent plus but still retains a lot of stake in the two banks mentioned above, the government owns over 90 percent. Then what would be the role of government in the future governance of these banks because the Act basically impacts the governance of these banks. So, any new owner will have to take those factors into account," explained Vardhan.

"The Nationalisation Act privileges the central government in a very serious way. It can make schemes, and so on and so forth. So, suggest a piecemeal amendment, which just says that the government can go below 51 percent is not going to solve all our problems," said Vardhan.

For the full discussion, watch the video

(Edited by : Anshul)

First Published:Nov 25, 2021 2:52 PM IST