PRIVATIZATION OR MERGER OF BANKS

Whether  FM legitimizing  Merger Rumours?  Or is she batting for privatization ?

Dated 05.11.2025 : Finance Minister Mrs Nirmala Sitharaman delivered an address yesterday at the Delhi School of Economics (DSE), where she discussed both the history of bank nationalisation and the current drive for privatisation.

1. What the Finance Minister Said (The Statements)

FM Sitharaman’s remarks focused on creating a historical contrast between the past era of state control and the current professional approach.

• Critique of Nationalization (1969): She stated that the nationalization of banks in 1969, despite helping to push priority sector lending and government schemes, did not fully yield the desired results in terms of financial inclusion and, crucially, led to the system becoming unprofessional under state control.
• The Problem of Misuse: She specifically referred to the misuse of Public Sector Banks (PSBs) in the past, which resulted in the “twin balance sheet problem” (high NPAs in banks and over-leveraged corporates) around 2012-13, a problem that took nearly six years for the government to fix.
• Defense of Privatization: She strongly rejected the common apprehension that the privatization of state-owned banks would compromise financial inclusion or national interest.
• The Professionalism Argument: She asserted that after the government professionalized the banks (through reforms, consolidation, and cleaning up their balance sheets), the objectives of financial inclusion and credit growth are now being “beautifully achieved.”
• The New Mandate: She emphasized that when banks operate professionally and their decisions are board-driven, they can effectively serve “every objective of the national interest and also the banking interest.”

2. What the Statements Implied

The statements served to achieve two main goals:

• Justifying the Current Policy: By pointing to the failures and unprofessionalism of the nationalization era, the Minister sought to logically justify the current government’s policy of reducing its ownership  in the banking sector.
• Dispelling Social Fears: Her reassurance that privatization (or strategic divestment) will not hurt financial inclusion (citing the success of the Jan Dhan accounts and current asset quality) aims to counter the long-standing political and social opposition, particularly from bank employee unions. The implication is that a well-run, professional, private entity can adhere to national mandates just as effectively, if not more so, than a politically controlled one.

3. Indication of a Policy Shift?

This is not an indication of a new policy shift, but rather  public affirmation and defense of the existing, well-established policy.

• Policy Consistency: The government’s policy to privatize two PSBs (in addition to IDBI Bank) was announced in the 2021-22 Union Budget. Since then, all actions—the massive consolidation drive, the IDBI Bank strategic sale, and the plans for minority stake sales in smaller PSBs—have been consistent with this policy direction.
• Increased Resolve: The FM’s strong historical critique of nationalization and confident defense of privatization in a public lecture environment suggests a firming up of the government’s resolve to proceed with its disinvestment agenda. It provides the intellectual and philosophical backing for the practical steps being taken (like the appointment of advisors for stake sales and the final stages of IDBI Bank’s privatization).

In essence, the speech was a forceful argument that the era of state-controlled banking has led to inefficiencies and crises, and that a professional, board-driven banking system—regardless of ownership—is the best way to secure both economic growth and national objectives. This reaffirms the commitment to the privatization process already underway.

The Finance Minister’s  statements regarding bank nationalization and the need for professional, board-driven banking give significant legitimacy to the ongoing strategic divestment (privatization) actions, but they actively discourage and undermine the current rumours about major mergers.

1. Legitimacy for Privatization (Strategic Divestment)

The statement strongly legitimizes the government’s existing policy of reducing its stake in PSBs:

• Critique of State Control: By labeling the post-nationalization system as “unprofessional” and prone to political misuse (leading to the NPA crisis), the Minister provided a powerful justification for moving away from majority state ownership.
• Defense of Professionalism: Her assertion that professional, board-driven banking achieves national objectives better implies that ownership (government vs. private) is less important than governance. This directly supports the move to privatize IDBI Bank and sell minority stakes in other PSBs, as the government is signaling it wants the banks to be run by professional boards accountable to all shareholders, not just the state.
• Policy Affirmation: The speech was a forceful political and intellectual defense of the current divestment actions, reinforcing that the government is  committed to the strategic privatization process that is already underway.

2. Legitimacy for Mergers (Consolidation Rumours)

The statement provides no legitimacy to the rumours about a new round of large-scale mergers (like merging 12 PSBs down to 3) and actually points in the opposite direction:

• Focus on Professionalism, Not Scale: The Minister’s emphasis was on the need for each bank to be professionally run and board-driven, not on the need to drastically reduce their number through further consolidation.
• The Current Roadmap: The official and most recent policy, reiterated after the “PSB Manthan,” is to hold off on further large-scale mergers and instead focus on strengthening the existing 12 PSBs through technology and organic growth.
• Mergers vs. Divestment: Mergers are a tool for consolidation and reducing competition; privatization is a tool for changing ownership and improving governance. The government is currently prioritizing the governance change (privatization) over the structural change (merger), as evidenced by the immediate action plans for IDBI Bank and minority stake sales

Conclusion:

The Finance Minister’s speech was a clear endorsement and strengthening of the ongoing privatization agenda. It legitimizes the government’s move away from the nationalized model. Conversely, the emphasis on strengthening individual banks through professional governance and the current lack of action on mergers indicate that the social media rumours about an imminent, massive merger are unlikely to materialize under the current policy direction. However, we have  to wait and see  how the government makes its decisions  and where it  will end as   there could be mismatches between actions and speeches 

The article  is  based on the replies we got from  a  responsible AI app