India’s banking sector remains heavily dominated by the government, a result of two rounds of bank nationalisation in 1969 and 1980. This policy was initiated to extend formal banking services to the unbanked population and further financial inclusion. However, decades later, the question arises: should the government continue to hold a majority stake in these banks?
Privatisation of public sector banks (PSBs) has long been a topic of discussion, but tangible progress has been elusive. In the 2021-22 budget, Finance Minister Nirmala Sitharaman announced plans to privatise two PSBs and one insurance company. Yet, over two years later, those plans remain unfulfilled.
The government currently holds a majority stake in 12 public sector banks, with ownership exceeding 90% in four of them:
- UCO Bank: 95.39%
- Punjab and Sind Bank: 98.25%
- Indian Overseas Bank: 96.38%
- Central Bank of India: 93.08%
While the Centre has initiated the process to privatise IDBI Bank, progress on broader privatisation efforts has stalled. As the Union Budget 2025 approaches, the big question remains: will it include announcements to revive the privatisation agenda?
The Reform Challenge
Privatising banks is a complex and politically sensitive reform. It requires addressing several entrenched challenges:
- Legacy Issues: Public sector banks are burdened by outdated processes, excessive bureaucracy, and heavily politicised trade unions that resist change.
- Work Culture: The traditional “sarkari” mindset and culture in these banks differ significantly from the dynamic and performance-driven approach of private banks. This culture shift will be a daunting task for potential buyers.
- Political Risks: Bank privatisation can trigger regional and political backlash. Most state-run banks have strongholds in specific areas, and any major changes to their structure could upset local interests and voter bases.
Successive governments, including both the UPA and NDA regimes, have consistently highlighted privatisation as a critical reform. However, the promises largely remain on paper. The most significant actions taken so far include the consolidation of 10 state-run banks into four in 2019-20 and LIC’s acquisition of IDBI Bank, which was more of a government-prompted bailout than true privatisation.
If the government is serious about banking sector reform, it must take concrete steps to dilute its stake in PSBs. While the move to privatise IDBI Bank is a start, it is insufficient to address the broader inefficiencies plaguing the sector. Missing this opportunity for big-ticket reforms over the next five years risks leaving Indian banks at a disadvantage, particularly as the sector faces increasing competition from private players and fintech companies.
A credible roadmap for privatisation requires political will and careful planning to overcome resistance and address the challenges of legacy issues and political sensitivities. The upcoming Union Budget could serve as a litmus test for the government’s commitment to this long-awaited reform.
For now, the fate of PSB privatisation hangs in the balance—a billion-dollar question awaiting its answer.