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2 more PSU banks to be privatised: Budget announcement

The central government intends to start the process of privatization of 2 public sector banks apart from IDBI Bank, Finance Minister Nirmala Sitharaman announced in her budget speech. She said this will be done in the next financial year. However, she did not name the 2 banks.

The Finance Minister also said the Government will divest stakes in a general insurance company besides undertaking the proposed IPO of LIC of India as part of the Rs 1.75 lakh crore divestment plan, which will conclude in FY 2022.


In a separate announcement, Sitharaman also said the government will undertake a recapitalisation plan worth Rs 20,000 crore for state-run banks.


The government will set up an asset reconstruction company (ARC) and an asset management company (AMC) – bad bank – to house stressed assets currently in the books of Indian banks.

The Economic Survey had called for a clean-up of banks’ balance sheets after the forbearance to be accompanied by a recapitalization.

While details of the proposed bad bank are not immediately available, it is expected to ease the bad loan burden by taking over those assets and attempting recoveries. Experts have been arguing that a bad bank will be effective in cleaning up the bad loan menace so that banks can solely focus on credit growth, which has taken a hit following the coronavirus pandemic.

The Finance Minister said the government is also moving an amendment to ensure that the deposit insurance of Rs 500,000 per account is recovered by the depositors in a time bound and easy manner even when the bank in question is in stress. There will be an alternate framework for debt resolution for micro-small and medium enterprises.


Sitharaman said the Government has earmarked Rs 1500 crore to provide financial incentive to promote digital payments. The incentive may give a boost to the digital payments ecosystem in India which is dominated by the likes of Google Pay, Walmart-owned PhonePe, Paytm, among others. According to the data released by the National Payments Corporation of India, UPI transactions stood at 2.1 billion in November 2020, up 7% from October 2020. Similarly, IMPS registered 329 million transactions in November 2020, up from 319 million in October 2020, according to the data.

Making the announcement, Sitharaman said “To give a further boost to digital transactions, I earmark Rs 1500 crore for a proposed scheme that will provide financial incentive to promote digital mode of payment… We have now worked out the modalities and the NRF outlay will be Rs 50,000 crore over 5 years. It will ensure the overall research ecosystem in the country is strengthened with focus on identified national priority thrust areas.”


Another major initiative announced in the budget is the Government’s intention in facilitating the setting up of a world class fintech hub in Gujarat International Finance Tec (GIFT) city. GIFT City consists of a conducive multi-service SEZ (Special Economic Zone) and an exclusive Domestic Area.


The Finance Minister also announced that the Government will set up a Development Finance Institution (DFI) with a capital of Rs 20,000 crore. The government has also set an ambitious lending target of Rs 5 lakh crore in the first 3 years. The earlier DFIs like ICICI, IDBI and IDFC and have all converted into commercial banks in the last 2 decades because of the asset liability mismatches. These DFIs had struggled to get long term funds to finance projects. The proposed new DFI would certainly go a long way in helping infra projects, but will require more funding support from the market as it scales up.

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