At the very outset, I am all for private enterprises, including in the banking sector. This article argues for privatisation of public sector banks. Ofcourse, the mid-sized and smaller-banks. But to what avail is the question here.
Governments, globally, have to choose to be in the business of public services and public governance. And not in the “business of business”, except for the core infrastructure needed for national security purposes. With that in mind, the government probably may have to continue holding two large banks, lest the private banks shirk their basic objectives, and slide away from social impact in the name of profiteering. The government has banks that can be privatised over a point in time.
Have these PSBs served the financial inclusion purpose as intended? No.
Have the private banks served the same purpose? No.
In fact, many real-economy projects are still funded by the PSBs, as private banks chase only the most lucrative deals and often indulge in cherry-picking. Hopefully, this could change, if the new DFI takes off as intended. While it might sound theoretical, if the RBI did not have the priority sector lending rule, private sector banks may not even do that!
Indian Banking
The size of the assets/liabilities of the Indian banking industry is expected to close at about ₹195 lakh crore by March-end 2022. It needs to double its credit growth to help achieve the $5 trillion GDP target. This would not only need more banks, but also newer banks under newer promoters. Else, it might defeat the purpose of credit dispensation during a slowdown (when typically promoters shrink the balance sheet). This also assumes that most of the banks should have a healthier balance sheet and long-term capital availability.
Today, the banking sector includes public sector banks (12), private sector banks (21), small finance banks (12), payments bank (6), regional rural banks (43), foreign banks (44), local area banks (3), financial institutions (4), urban cooperative banks (1531), multi-state cooperative societies & banks (1130).
These different categories of licences were meant to solve a segmental need and to achieve financial inclusion. The challenge around now is that most of those categories have not achieved much, but for minor tick-marks.
Privatisation difficulties
It is widely anticipated that the final decision and all approvals for privatisation of two PSBs would come through soon. The challenge of privatisation is a critical one.
This piece does not even debate about the political will needed for handling the bank unions and their issues. This also assumes that the commercial negotiations between the government and prospective bidders would have the usual bells and whistles, which would be made public, as these banks are listed entities.
Let’s talk about money, as that’s what would count for in an M&A. Assuming that the government would divest its entire stake in the two banks under discussion, it stands to gain at least ₹57,000 crore. (Indian Overseas Bank’s market cap is over ₹40,000 crore and the government holds 96.38 % stake. Central Bank of India’s market cap is nearly ₹20,000 crore and the government holds 93.08% stake.)
For the government, this disinvestment along with partial disinvestment in LIC through its IPO could mean accrual of over ₹1,10,000 crore. This could give comfort to the exchequer, as well as the global rating agencies, who could look at upgrading our sovereign rating. Instead of the above-mentioned banks, even if the government picks any other of its banking entities to disinvest, the logic remains the same, but the amount it could gather might vary.
Can current disinvestment bring newer bank promoters?
As of now, corporate groups and industrial houses are not allowed to own banks. While they might have the intent to own a bank or to promote a new one, they cannot participate in the PSB disinvestment process. So it would likely be existing private banks or private equity firms, who will look at the bidding process.
If there is clarity in allowing certain scaled and financially-sound NBFCs to participate in the process, that could open up one more participant. After all, being regulated by the RBI, the regulator would have supervisory insights/reports. Thus, the possibility of giving a pre-bid eligibility nod could be looked at.
Will selling the PSBs to existing private banks, currently operating in India, solve the financial inclusion problem or widen the benefits for consumers? Not sure.
If there is no complementarity of services or products or consumer-ease that’s offered by such a M&A, why should the PSB be given to an existing player? Of course, one can take a capitalist view and argue for the government as an owner, selling its stakes to book profits. And it would be a perfectly acceptable rationale too. After all, it still needs hard work to get in the $7 billion+ in a M&A. There starts the dilemma. Sell, but to existing industry participants or a new one? Disinvestment with outcome, or disinvestment with socio-economic impact?
