Global recession fears and volatile markets are also among the deterrents for the government to shun its immediate bank privatisation plans.
The government may start with one public sector bank and use that to set the path ahead, said Sanjay Agarwal, Senior Director at CareEdge Ratings.
“The budget may at most announce the successful privatisation of one bank. This will also define the path for future privatisations, if any,” Agarwal said.
In the Union Budget for 2021-22, the government had announced its intent to take up the privatisation of two state-run banks in the year. It also approved a policy for strategic disinvestment of public sector enterprises.
Sakshi Gupta, Principal Economist at HDFC Bank, expects the government to reiterate the previous years’ announcement (of privatisation of two PSB banks) and commitment towards delivering the same in this fiscal year that starts April 1.
“The rising risk of a recession in major economies and global uncertainty due to rising Covid cases yet again might lead to volatile market conditions and discourage the government from factoring in significant privatisation/disinvestment proceeds in the budget calculations,” Gupta said.Pace of privatisation
“We must remember that the PSBs have been an integral part of various government economic policies. Look at Jan Dhan where accounts have been opened for all people. This could not have been done without PSBs as private banks have shown little interest,” said Sabnavis.
“As long as PSBs are owned by the government, this would be possible. Otherwise, once left to the market, the success of such programmes would be uncertain. Even for SME lending it will still be time before there are alternatives like SFBs covering a large canvas. PSBs will have to continue to operate here. Therefore, the pace of privatization in my mind has to be guarded and done in steps after being sure of everything,” he added.
Currently, bank divestments in India are led by sale of minority stakes in the public sector banks either by investors providing fresh capital to banks (thereby reducing the shareholding percentage of government) or by direct sale of government shareholding to external investors, said Sanjay Agarwal.
He pointed out that there has been no instance of sale of majority stake to private bodies. The intention to privatise two banks is still a work in progress.
“With restrictions in ownership patterns, there are no examples of concluded transactions. Hence, the approach has to be gradual with complete hand holding, so as to not upset the applecart,” he said.
State Banks & Bad Loans
The Reserve Bank of India recently said banks’ gross non-performing asset ratio has fallen to a seven-year low of 5%, and the banking system remains sound and well-capitalised.
The NPA problem was because of legacy issues, which have been more or less resolved as seen by the decline in these ratios for all public sector banks, said Madan Sabnavis. He pointed out that privatisation has different motivations.
The government is now convinced that the PSBs are in very good shape and are more marketable than they have ever been, he said, given that the financial system is quite ‘sophisticated’ today. Keeping this in mind, the government is thinking of unlocking the value of these banks, he added.
Such asset sales, according to him, helps the government to move out of non-strategic commercial activity and also helps to bring in revenue for the government.
The PSB mergers
On decreasing the number of PSBs via mergers before privatisation, Sabnavis said there are arguments both for having a lesser or higher number of PSBs.
He said the idea of mergers was more to build scale and also to assimilate different categories of banks. Those that have been left out are more regional in nature and have been allowed to function as single entities. The entire approach, according to him, is ideology since all of them are owned by the government.
The larger the bank the more complex it gets to manage business, especially since most banks have strength in specific regions with few being more of national character. Having more banks has served the process of covering a larger canvas as most of them had regional strengths.
Now the decision on which banks to privatize or merge and whether at all to do so will depend on the motivation of the government. We must remember that the RBI through its notification on large exposures also wants banks to reduce exposures to single entities/groups, he added.
Who should be allowed to buy the banks?
Sabnavis said, “We must keep in mind that there should be no scope for an oligopolistic structure to emerge when such a process takes place.”
Similarly, as RBI has not been open to business houses running banks, there is reason to believe that this would not be appropriate, he added.
Financial investors may see value and depending on the holding that is permitted when offered and would move in accordingly. As this has never been done before, it must be done very carefully and not in a hurry, he explained.
Banking, unlike any other business, meets a lot of social objectives and there has to be alignment in interests of the government, RBI and prospective owners, he said.
Banking as business
Banking as a business is far more atomised than commodity plays such as Hindustan Zinc or businesses addressing sections of society which are slightly more well off like Air India. Banking caters to masses, classes and institutions, said Sanjay Agarwal.
Structurally, banking requires customer confidence and play on both sides of the balance sheet – deposits and advances. Unlike manufacturing or services, banking is based on a fractional reserve method of business and is very highly leveraged (contribution of owners to total fund requirements is very small). Hence, small uncertainties get magnified and the trust basis of business suffers immensely, he added.
Banking business sees only gradual changes. In the last five years, while SBI has been able to maintain its share in banking business at around 24%, the market share of other PSU Banks (combined) has reduced from 42% to 34%. This has been taken over by private banks who now have 35% market share (compared to 27% earlier). The balance 8% is maintained between foreign banks and regional banks. As an industry, the market share is being taken by private banks from other PSU Banks.
Will state-run banks cede more ground to the private sector?
Abizer Diwanji, Head, Financial Services at EY India, said the process would be slower but is certainly happening as the private sector is more agile and offers better customer convenience. Even on the corporate lending side, some large banks have set up alternative lending platforms and are able to offer complete customer solutions.
Government sector banks have taken initiatives like the EASE program but unless there is behavioural change and specific change management programs along with appropriate incentivisation, we may see high investments in technology with little change in market share or actual behaviour, Diwanji added.
The government would eventually head towards giving control of banks to the private sector for various reasons. This has started with IDBI bank but can happen with other banks as well. Also, for the large public sector banks state run incentives should be subsidised by the government who could continue holding shares but should assign control to an independent board comprising experts, he said.