The Centre has decided against merging public sector banks (PSBs) in FY25 but is set to proceed with privatising PSBs during the fiscal year. Currently, there are no proposals to merge additional PSBs, nor are there any plans to abandon the privatisation agenda.
As of now, India has 12 PSBs, down from 27 in 2017, following a series of mergers aimed at improving their financial health.
In FY25, the government aims to finalise the strategic divestment of IDBI Bank.
This follows delays due to various reasons, including the vetting process of interested bidders. The government had planned to issue financial bids for IDBI Bank by December 2023 and complete the transaction in the fourth quarter of FY24. CSB Bank, Kotak Mahindra Bank, and Emirates NBD are among those that submitted initial bids for the government’s majority stake in IDBI Bank.
The government and Life Insurance Corporation of India (LIC), which together hold over 90% of IDBI Bank, plan to sell a 60.7% stake in the lender.
The divestment process will be carried forward by the new central government following the RBI’s vetting of bidders.
The government is also expected to revisit its bank privatisation plan and redraw the list of PSBs to be privatised, considering the improved profitability and reduced bad loans of banks. A new panel, including representatives from the finance ministry, NITI Aayog, and the Reserve Bank of India (RBI), may be formed to reassess and identify suitable candidates for privatisation.
Under the current government, significant mergers included the consolidation of Oriental Bank of Commerce and United Bank of India with Punjab National Bank, making it the country’s second-largest bank after the State Bank of India. Other notable mergers involved Dena Bank and Vijaya Bank with Bank of Baroda; Allahabad Bank with Indian Bank; Andhra Bank and Corporation Bank with Union Bank of India; and Syndicate Bank with Canara Bank.
PSB privatisation
Finance Minister Nirmala Sitharaman previously announced in the 2021-22 budget that the government intended to privatise two public sector banks and one general insurance firm, aside from the strategic stake sale in IDBI Bank.
The success of privatisation hinges on overcoming several challenges. State-run banks face legacy issues such as politicised employee trade unions and a traditional work culture that differs from private banks. A credible buyer must be willing to address these deep-rooted issues.
Privatising banks is also politically risky, given the regional strongholds of each bank and the potential for local backlash. While a majority government might have more political muscle to push through such reforms, a coalition government faces a less favorable political climate.
Privatisation involves selling a majority or controlling stake in a bank to a prospective buyer. The government aims to restart this process and attract potential buyers. This time, the chances of success may be higher. Indian banks now have cleaner balance sheets.
The gross non-performing assets ratio of Indian banks fell to a multi-year low of 3.2 percent in September 2023, and the net non-performing assets ratio eased to 0.8 percent. These improvements, largely due to substantial loan write-offs, have resulted in cleaner books for PSBs, which had previously concerned investors.
However, employee unions in PSBs remain a significant force, opposing privatisation and can mount considerable resistance. Despite improvements in bad debt levels, the bureaucratic culture that led to unhealthy lending habits persists. Transitioning to a fully professional, board-driven culture will be challenging, especially with increasing competition from private and foreign banks, small banks, and fintech companies.
