Government’s decision on Privatisation of banks in the upcoming Budget 2025

Overview
In India, the government has the largest ownership in the banks. This biggest stakeholder position is the result of two phases of nationalisation. The first nationalisation occurred in the year 1969 in which 14 banks were nationalized which includes Bank of Baroda, Bank of India, and some other banks. While the second phase occurred in the year 1980 in which around 6 banks were nationalized which includes Punjab and Sind Bank, Andhra Bank, and some other banks. In present times, there are 12 nationalised banks as many banks merged together over the period of time.

The primary aim of the government was to achieve financial inclusion in banking services by reaching services to the country’s underbanked and unbanked population.

The matter of concern is about whether the major stake of the Indian government in these banks should remain the same. In the financial budget of 2021-22, Finance Minister Nirmala Sitharaman announced plans of two public sector banks and one insurance firm to be privatised. Despite this, the privatisation promise is yet to be fulfilled.

Current Ownership of government in Banks
In present times, the government still holds a major ownership in these 12 nationalised banks, with more than 90 percent of ownership in four banks. The names of these four banks are Punjab and Sind Bank (98.25%), Central Bank of India (93.08%), UCO Bank (95.39%), and Indian Overseas Bank (96.38%).

Push to Bank Privatisation plan
If the government is serious about the bank privatisation plan, then it should start the process in the Budget 2025. The privatisation process of IDBI is already going on and is expected to be completed by the financial year 2026. This privatisation alone is not enough if the government really wants to achieve reforms in the banking sector. Also, if the actions are not taken then it will miss significant reforms in the upcoming five years leading to hindering the progress of the banking sector in India.

Government Actions
In the past, both United Progressive Alliance (UPA) and National Democratic Alliance (NDA) have promised privatisation of banks as their top priority in their agenda of reforms. Despite this, no actions were taken. In the financial year 2019-20, a mega-merger of 10 public sector banks took place resulting in formation of 4 banks. The IDBI bank was suffering from poor financial health. In the year 2019, the government took the initiative to purchase shares in the IDBI bank, along with the Life Insurance Corporation of India (LIC). This was done to improve the financial health of the bank. These are only actions so far taken by the government of India.

Challenges in privatisation of banks
The public sector banks suffered from legacy issues for a long period of time. The employee trade unions in these banks are strongly influenced by politics. Also, the working environment here is just like a government office working environment. It is totally different from the modern and dynamic working environment of the private sector banks. These challenges could act as an issue for a serious buyer. The reason is that the buyer should be willing to deal with these issues and able to make necessary changes.

Privatisation of banks is quite a difficult and risky political situation for the government as well. The public sector banks involved the issue of regional interests as each bank has a strong presence in certain regions. The topic of privatisation of these banks may not be liked by people living in those regions. This can become a sensitive topic because no government can take a risk of political backlash.

Due to these regional and political issues, it is difficult to implement this plan in action. Despite this, it is upto the government and its budget 2025 to decide if they can work on a bank privatisation plan.

The image added is for representation purposes only

The Unfolding Battle: Banks Intensify FD Rate Hikes Amid Rising Deposit Demand

In recent times, banks have been engaged in a competitive battle to attract depositors, particularly as Fixed Deposit (FD) rates continue to rise. The higher rates reflect not only increased demand for capital but also tighter liquidity conditions. Banks, seeking to bolster their balance sheets, have ramped up deposit offerings in response to both internal funding needs and external pressures, such as rising interest rates set by the Reserve Bank of India (RBI).

For depositors, this environment presents an attractive proposition: higher returns on FDs compared to traditional savings accounts. However, these rate hikes signal more than just a win for savers. They reflect a broader economic picture where inflationary concerns, a tight monetary policy, and rising borrowing costs are impacting the financial ecosystem.

Impact of Rising Rates on Banks and the Economy
While the FD rate hikes may provide short-term benefits to depositors, they pose challenges for banks, particularly in terms of margin compression. Higher deposit rates mean increased costs for banks, which could result in tighter profit margins. As banks strive to keep up with one another’s offerings, the increased pressure to offer attractive rates may lead to a shift in lending strategies or a reduction in loan volume. The implications for businesses and consumers could be far-reaching, with costlier loans potentially affecting economic growth.

Furthermore, the competition for deposits might intensify as non-banking financial companies (NBFCs) and small finance banks also enter the fray, vying for a piece of the deposit pie. This heightened competition, combined with the potential for interest rate hikes by the RBI, underscores the volatile nature of the financial market.

Strategic Implications for Investors and Businesses
For investors, rising FD rates can be seen as a safer avenue to park funds, especially amid market volatility. Fixed deposits, once considered low-yielding, have become more competitive, offering attractive interest rates that provide a buffer against inflation. However, the upward trend in FD rates also presents an opportunity for investors to reassess other asset classes like equities, real estate, and bonds, all of which might yield higher returns, depending on market conditions.

In the longer term, businesses looking to raise capital may face a more challenging environment, as higher FD rates could lead to an increased cost of funding. Companies heavily reliant on debt might experience higher borrowing costs, impacting profitability and expansion strategies. At the same time, the upward movement in deposit rates indicates a potential tightening in credit conditions, which could further strain liquidity in the economy.

Conclusion: A Balancing Act for Banks and Investors
The rising FD rates represent a crucial development in the Indian banking sector, where competition and shifting monetary policies are driving up deposit costs. For banks, the increased cost of funds might pose challenges to profitability, while savers benefit from the elevated rates. Investors and businesses, meanwhile, should stay vigilant, carefully evaluating their financial strategies in the face of tightening credit conditions and potentially higher borrowing costs.

The “war” for deposits is far from over, and as the financial landscape continues to evolve, both banks and investors must navigate this changing terrain, balancing risk and reward to ensure sustainable growth.

The image added is for representation purposes only