Centre seeks to grant bank licence to PSBs to enable privatisation

Amendments moved by the Centre to enable privatisation of two public sector banks (PSBs) may provide them a “bank licence” after the government gives up majority shareholding in these lenders. 

With the government finalising amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, privatisation of two PSBs, will require granting them a banking licence, said an official.

When banks were nationalised, they were allowed to continue with banking operations, said an official. Bringing down the government’s shareholding in the banks below 51 per cent may require them granting a banking licence.

Banks nationalised through the bank nationalisation act were not required to get a banking licence, the official said. Under the Banking Regulation Act, only ‘banking companies’ are required to have bank licences, he added. Through the Banking Companies (Acquisition and Transfer of Undertakings) Act, nationalised banks were set up as ‘body corporates’ and allowed to transact the business of banking. Transitioning from public sector to private sector or privatising PSBs will require granting them a banking licence.

The government is exploring several options to address the issue for enabling privastisation of PSBs. This may be done through the ‘Scheme for Privatisation of PSBs’ that the Centre seeks to insert, through a new chapter, in the Banking Laws Amendment Bill, another official said. The Centre is planning to introduce the amendments to the bank nationalisation act in the monsoon session of Parliament starting on July 18. 

The Centre is also in discussions with the Reserve Bank of India (RBI) on whether these PSBs can be deemed with a banking licence under Section 22 of the RBI Act. The NITI Aayog has reportedly suggested privatisation of the Central Bank of India and the Indian Overseas Bank.
 

Section 22 of the Banking Regulation Act states that no company shall conduct banking business in the country unless it holds a licence issued by the RBI.

A similar situation had arisen when the centre was readying the privatisation of IDBI Bank as the lender was exempt from obtaining a banking licence when it was converted from a development bank to a banking company. The government had then moved amendments in the Finance Bill 2021 to grant IDBI Bank a banking licence.

Implementing such a change with IDBI Bank was simpler as the lender was governed under a separate statute, the official said. Carrying out such a change for other PSBs will be a complex exercise as almost all of them come under the bank nationalisation act, he added.

The Department of Financial Services (DFS) is also finalising whether the Centre would continue to hold some stake in PSBs post privatisation or exit completely. In an interview with Business Standard last week, Finance Minister Nirmala Sitharaman had said “whether I would want to retain some minimal stake (in public sector banks selected for privatisation) and let go of a majority strategically — all that is part of a decision-making process”.
 

In the previous draft of the banking amendment laws that the Centre was planning to move in the winter session of Parliament, the government had sought to retain 26 per cent in PSBs even after privatisation.

According to the officials, the government’s thinking is inclined towards retaining some stake in PSBs that are privatised. This is based on the government’s past experience that retaining some stake in privatised PSUs has helped generate both value and garnering handsome divestment receipts.

THE TWO OPTIONS

• Centre may grant licence to selected banks for privatisation through the ‘Scheme for Privatisation of PSBs’ proposed in the Banking Laws Amendment Bill
• Else it may follow the route adopted for granting license to IDBI Bank