RBI Recommends Reduction of Government Stake in Six Top Public Sector Banks

The Reserve Bank of India (RBI) has recommended to the Centre a reduction in shareholding of the latter in six top Public Sector Banks (PSBs) to 51 per cent in the next 12-18 months. This move aims to improve the valuation and sale of these banks. The six banks in question are the State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), Canara Bank, Union Bank of India (UBI), and Bank of India (BOI). The Centre is expected to garner around Rs 25,000 crore by shedding its stake in these banks, which could potentially increase to Rs 43,000 crore.

The RBI's move follows the recommendations of the Nayak Committee, which suggested the setting up of a bank investment company (BIC) where all Government shares in PSBs will be vested. This would allow the BIC to take decisions on behalf of the sovereign Government with full autonomy. The committee also recommended the divestment of the Government's shareholding in all PSBs to below 50 per cent. However, the Centre's divestment of its majority stake in IDBI Bank to the Life Insurance Corporation (LIC) has not yielded the desired results, with LIC being re-classified as promoter of the bank with management control.

The Government's majority ownership and control of PSBs have led to several issues, including the cult of "crony capitalism," where businessmen patronized by the ruling establishment managed loans on considerations other than merit and got them ever-greened. The political brass also rides piggyback on PSBs for absorbing liabilities created by populist policies such as supplying power to farmers and households at subsidized rates. This has resulted in high non-performing assets (NPAs) for PSBs, with gross NPAs reaching a high 11.5 percent in March 2018.

To address these issues, the RBI should strengthen its supervision over banks to guard against irregularities and mismanagement. It should also maintain strict vigil over auditors to ensure that they perform their duties diligently. The Government should set up a BIC with eminent professionals as members, and all of its shareholding in all PSBs should be transferred to the BIC. This would allow the BIC to take decisions on behalf of the sovereign Government with full autonomy and ensure that PSBs are treated on par with private sector banks.

Key Takeaways:

• The RBI recommends reduction of Government stake in six PSBs to 51 per cent in the next 12-18 months.
• The six banks in question are SBI, PNB, BOB, Canara Bank, UBI, and BOI.
• The Centre is expected to garner around Rs 25,000 crore by shedding its stake in these banks, which could potentially increase to Rs 43,000 crore.
• The RBI's move follows the recommendations of the Nayak Committee, which suggested the setting up of a BIC and the divestment of Government shareholding in all PSBs to below 50 per cent.
• The Government's majority ownership and control of PSBs have led to issues such as the cult of "crony capitalism" and high NPAs.
• The RBI should strengthen its supervision over banks and maintain strict vigil over auditors to ensure that they perform their duties diligently.
• The Government should set up a BIC with eminent professionals as members and transfer its shareholding in all PSBs to the BIC.

Statistics:

• Gross NPAs of PSBs had reached a high 11.5 percent in March 2018.
• NPAs may worsen to 12.5 percent by March 2021 under the optimistic baseline scenario (14.7 percent under a severely-stressed one).
• The value of bank frauds in recent years has increased, with Rs 64,000 crore during 2018-19 and Rs 110,000 crore during the first six months of 2019-20.

Sources:

• Reserve Bank of India (RBI)
• Nayak Committee
• Government of India
• Indian Express
• HT Digital Content Services
• Pioneer