BANK PRIVATISATION-Buyer may not be willing to take pension liabilities

Potential buyers will need clarity vis-a-vis the pension liabilities of the two public sector banks (PSBs) the government intends to privatise as they may not be willing to take over these liabilities.

To attract investors, industry experts say the government may have to hive off the pension funds of the two yet-to-be-identified PSBs that will be put on the block.

A huge burden

CVR Rajendran, MD and CEO, CSB Bank, underscored that pension is a huge burden for PSBs.

While the Thrissur-headquartered private sector bank has made an internal assessment of 3-4 PSBs for possibly acquiring one of them, Rajendran said the bank is now redoing the calculations vis-a-vis the pension liability.

“Out of our bank’s wage bill, more than one-third goes towards pension….the outgo on account of pension alone amounts to almost ₹100 crore a year. This liability is very high in the case of PSBs. For example, a mid-sized PSB is having about 32,000 retired employees.

“So, we are redoing the calculations as to whether it is worth bidding for PSBs. We may not show much interest (in bidding),” said the CSB Bank chief.

Rajendran said the bank is confident of growing its business organically by minimum 25 per cent every year.

Actuarial valuation

Banking expert V Viswanathan observed that before the government sets the ball rolling on the privatisation of two PSBs, actuarial valuation of their pension funds should be done and, shortfall, if any, in respect of retired and serving employees, should be provided beforehand.

Further, the pension fund should be hived off so that it is independently managed by agencies such as the Life Insurance Corporation of India or other pension fund managers, who will guarantee monthly pension payments, commutation of pension on retirement, among others.

“The acquiring bank should continue to remit 10 per cent of pay as hitherto in respect of serving employees. It should also undertake to pay additional obligations arising out of promotions…

“The government should guarantee continuation of the pension scheme, its implementation and all payments due to employees covered under the scheme till the final payment is made (they were absorbed as PSB employees and the government has the obligation),” said Viswanathan

In her Budget speech on February 1, Union Finance Minister Nirmala Sitharaman said that besides IDBI Bank, the government propose to take up the privatisation of two PSBs and one general insurance company in the year 2021-22.

CARE Ratings, in a report in February, said the government could raise between ₹6,400 crore and ₹12,800 crore if it cuts its stake to 51 per cent in two of the four PSBs – Indian Overseas Bank (IOB), Bank of Maharashtra (BoM), Bank of India (BoI) and Central Bank of India (CBoI) – said to be the candidates for disinvestment.