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A push to public sector banks (PSBs) towards privatization. 


The Finance Minister of India, Nirmala Sitharaman is debating whether to amend the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, to exclude the two public sector banks (PSBs) from their provisions. As a result, such banks will be subject to the Banking Regulation Act and the Companies Act.

The government of Indira Gandhi nationalized 14 private banks in 1970, followed by another six banks in 1980. Fin. Min. Nirmala Sitharaman revealed the administration's decision to privatize two PSBs and a general insurance company during this year's Union Budget discussion, as part of a larger strategy to privatize more PSBs.

Privatization is urgently needed although, well before the pandemic, the market capitalization of PSBs with bad loans was slowly and significantly weakening. The government has begun inter-ministerial consultations in order to deploy the required legislative changes for the privatization of public sector banks (PSBs). 

According to official reports, the aim is to amend the relevant laws all at once so that the PSB privatization process is not hampered by legal issues.

Another point under consideration is a provision in the Banking Regulation Act of 1949 that states that no shareholder of a public or private bank may exercise more than 26% of their voting rights. When promoters are granted more voting power, a more liberal banking structure is often achieved. Banks would like to expand and implement the proper governance mechanisms. 

There have been 5-6 banks that were government-owned at one time but were not nationalized, including Axis Bank, ICICI Bank, and IDBI Bank. As a result, their privatization went relatively smoothly. Legislative action on nationalization acts and banking regulation acts is required in the monsoon session of Parliament after consultations and seeking input.

By reducing the number of state-run banks from 27 in 2017 to 12 today, the government has made substantial progress. By lowering the number, the market is now less crowded, with just a few strong banks at the top, feeding the economy's increasing demand for credit. Greater synergy aids in the recovery of economic processes and cost reduction.

The government will ultimately keep four state-run banks under the current strategic sector scheme, while the others will be combined or privatized. to prioritize the privatization of the smaller PSBs Punjab & Sind Bank, Bank of Maharashtra, and Uco Bank. 

The government could combine the remaining five PSBs with the four larger ones it wants to keep. Alternatively, it could cut its stakes in the five PSBs to 26% before exiting fully.

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