Budget may unveil next round of public sector bank reforms, Pg15

Key Highlights:

• Government is planning further consolidation of Public Sector Banks (PSBs) through mergers of smaller banks.
• The government is considering diluting its ownership in PSBs to around 51% to facilitate independent capital raising.
• Focus of consolidation is expected to be on the five smallest PSBs by asset size.
• Proposal to increase Foreign Direct Investment (FDI) limit in PSBs from 20% to potentially 49% is under consideration.
• Reforms are aimed at creating two Indian banks that can rank among the world's top 20 by assets.
• Reform roadmap is expected to be executed between 2026 and 2028.
• As of March 2025, State Bank of India (SBI) leads with assets of Rs 66.76 lakh crore.

Detailed Insights:

• The strategy involves merging smaller PSBs with mid-sized banks to create institutions compatible with larger state-run lenders.
• Previous mergers in 2019-20 faced challenges like IT integration issues, branch overlaps, and staff rationalization problems.
• Future mergers are expected to avoid combining banks headquartered in the same region to minimize operational disruption.
• Increasing the FDI limit in PSBs aims to attract long-term global capital, aligning them closer to private sector banks which allow up to 74% foreign ownership.
• Currently, investors in PSBs have restricted voting rights (10%) compared to private banks (up to 26%), discouraging large institutional and strategic investors.
• Aligning FDI limits and voting rights in PSBs with those in private banks could make PSBs more attractive to investors while maintaining government control.
• The voting rights cap in private banks was last raised from 10% to 26% through the Banking Laws (Amendment) Act, 2012.
• The government aims to reduce the number of PSBs from the current 12 to three or four large institutions.

Key Concepts Involved:

• Public Sector Banks (PSBs): Banks where the government holds a majority stake.
• Consolidation: The merger of multiple entities into a single, larger entity.
• Foreign Direct Investment (FDI): An investment made by a firm or individual in one country into business interests located in another country.