India’s Banking Sector Update: No New PSB Mergers, Focus Shifts to Privatization in FY25

The Indian government has made it clear that while no new public sector bank (PSB) mergers are planned for FY25, the agenda for privatizing certain PSBs remains firmly on the table. This dual strategy aims to fortify the banking sector and improve its overall health.

Current Status of PSB Mergers

Presently, there are no proposals to merge any additional public sector banks. A senior official, speaking on the condition of anonymity, confirmed, “We are not aware of any discussions on merging public sector banks or giving up on privatization.” This statement aligns with recent reports that suggest the government is focusing on other strategies to bolster the banking sector.

India’s PSB landscape has significantly transformed over the past few years. In 2017, the country had 27 PSBs. Today, only 12 remain, following a series of mergers aimed at consolidating and strengthening the banks. These mergers were largely driven by the need to address the massive non-performing assets (NPAs) that plagued the sector.

Historical Context of Mergers

The major wave of PSB mergers occurred during 2019-2020. The government initiated these mergers as a response to the financial distress caused by high levels of bad loans. The consolidation was designed to create larger banks with stronger capital bases, thereby reducing operational and administrative costs.

Key mergers included:

• The Oriental Bank of Commerce (OBC) and the United Bank of India with Punjab National Bank (PNB), making PNB the second-largest bank in India.

• Dena Bank and Vijaya Bank merged with Bank of Baroda.

• Allahabad Bank merged with Indian Bank.

• Andhra Bank and Corporation Bank merged with Union Bank of India.

• Syndicate Bank merged with Canara Bank.

Focus on IDBI Bank Divestment

One significant item on the government’s agenda is the strategic divestment of IDBI Bank. The government, which owns over 45% of IDBI Bank, along with the Life Insurance Corporation of India (LIC), which holds a 49.24% stake, plans to sell a 60.7% stake in the bank. This move is part of a broader strategy to privatize certain PSBs.

The government aims to finalize this divestment in FY25. Despite previous delays, the divestment process is moving forward, with significant interest from various bidders. Among the notable contenders are Prem Watsa-backed CSB Bank, Kotak Mahindra Bank, and Emirates NBD.

Revisiting Bank Privatization Plans

Last October, Mint reported that the government intended to revisit its bank privatization strategy. Given the improved profitability and reduced bad loans of PSBs, a fresh list of banks for privatization is being considered. This new approach involves creating a panel with representatives from the finance ministry, NITI Aayog, and the Reserve Bank of India (RBI) to reassess and select suitable candidates for privatization.

A senior official indicated that while no new proposals for PSB privatization have emerged yet, this could change in the future. The strategic divestment of IDBI Bank remains a priority, with the government committed to completing this process within FY25.

The Road Ahead

The strategic divestment of IDBI Bank is expected to be carried forward by the new central government, which will come into power in June. The vetting of bidders by the RBI is a critical step in this process, ensuring that only financially sound and capable entities take over the bank’s operations.

Finance Minister Nirmala Sitharaman, during the presentation of Budget 2021-22, had stated the government’s intention to privatize two public sector banks and one general insurance firm, apart from the strategic stake sale in IDBI Bank. This announcement underscores the government’s commitment to reforming and revitalizing the banking sector.

In Conclusion, while the Indian government has ruled out further PSB mergers for FY25, the focus remains on privatizing select public sector banks to enhance their efficiency and financial stability. The strategic divestment of IDBI Bank is a key component of this plan, with significant progress expected in the coming fiscal year. As the government continues to explore new strategies and revisit its privatization plans, the banking sector is poised for substantial transformation and growth.