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06/01/2021

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Centre mulls 'bad bank', PSB privatisation for Budget 2021

The Union Government is considering several policy measures for the Indian banking sector, including setting up of a bad bank and privatisation of few state-run banks.

The Union Government is considering several policy measures for the Indian banking sector, including setting up of a bad bank and privatisation of few state-run banks.

A bad bank is a bank set up to buy the bad loans and other illiquid holdings of another financial institution. Even though a custodian for the stressed assets has been provisioned for long, but, it has never materialised.

This is likely to be part of the government`s new strategic disinvestment policy, which is also likely to include the insurance sector.

This would be a major move towards meeting the government`s disinvestment targets.

The most significant feature of the upcoming policy would be the inclusion of financial sectors under its ambit.

Though privatisation is on the cards, further recapitalistion of PSBs cannot be ruled out. According to people in the know, the government may go ahead with another round of recapitalisation, to enable the banks create a strong buffer amid the pandemic.

Last year, the Niti Aayog suggested the privatisation of three banks - the Punjab & Sind Bank, UCO Bank and the Bank of Maharashtra, according to people in the know.

Further, the talks of stake sale in banks under the new policy, came after the merger of 10 public sector banks came into effect on April 1, 2020.

With the merger coming into effect, India currently has 12 public sector banks, down from 27 in 2017.

During the announcement of the Aatmanirbhar Bharat economic package in May last year, Finance Minister Nirmala Sitharaman had said that the Centre will come up with a new Public Sector Enterprise Policy, and open up all sectors to the private sector.

She had said that under the new policy, a list of strategic sectors requiring presence of PSEs in public interest will be notified and in these sectors, at least one enterprise will remain in the public sector and the private sector will also be allowed.

In the Union Budget for FY21, the government had set a disinvestment target of Rs 2.1 lakh crore. The target has, however, been described as ambitious by many as the Centre was not able to reach anywhere near its target in the last fiscal.

The already lagging disinvestment plans have been severely impacted by the ongoing pandemic.