The privatisation of Public Sector Banks (PSBs) has been a major issue of debate for a long time. This debate has once again caught fire as the government, according to the media reports, wants to revisit its strategy for the privatisation of PSBs. Minister of State for Finance, Bhagwat Karad, in a written reply in the Lok Sabha had also cleared the stand of the government. The government is intended to take up the privatisation of two public sector banks under the policy of Strategic Disinvestment of Public Sector Enterprises that was announced on February 1, 2021.
Earlier, under the new Strategic Disinvestment Policy (SDP), Finance Minister, Nirmala Sitharaman, had proposed the privatisation of two PSBs in her budget speech of 2021. In this backdrop, Niti Aayog had recommended the privatisation of two PSBs — the Central Bank of India and the Indian Overseas Bank to the Department of Investment and Public Asset Management (DIPAM), in April 2021. However, the final decision of privatisation of two PSBs could not be taken as yet.
The government may set up a panel to enlist the name of banks that can be privatised. The officials from the DIPAM, Reserve Bank of India (RBI), and Niti Aayog may be included in that panel. The focal point of the privatisation programme will likely be on mid and small-sized state-run banks, not the enormous ones. It is expected that the stake sale of IDBI Bank shall be completed this year.
Although, it will be the discretion of the panel to determine the quantum of stake sales on the basis of the financial performance of PSBs, their bad loan portfolio and other parameters. Notwithstanding, the government is yet to decide whether it wants to completely exit from the targeted PSBs or retain some stake. According to the Economic Times, there are five prospective candidates for privatisation and these state-owned lenders are — the Central Bank of India, UCO Bank, Indian Overseas Bank, Bank of Maharashtra, and Punjab and Sind Bank.
Earlier Attempts
The public sector banks have been the engine of growth in India since their nationalisation. However, later on, a few of them started incurring losses and became a fiscal burden on the country’s central exchequer. These banks were suffering serious disintegration in their productivity, efficiency and profitability. Infusion of capital was the biggest challenge before the government to meet the Basel II norms for the capital adequacy of banks.
In 1991, the government had decided to restructure the banking sector to address the issue and infuse greater competition and efficiency in its working and increase its profitability. Accordingly, two committees were formed and both were headed by Maidavolu Narasimham. The first committee was known as Narasimham Committee I and the second was called Narasimham Committee II. The committee submitted its report and asked to divest a percentage of shares of PSBs along with other recommendations.
A Task Force led by the then CEO of ICICI, K.V. Kamath, appointed by CII on NPA in the Indian financial system, had submitted its report in 1999 and recommended the closure of the three poor-performing banks among other recommendations. The report was opposed by the trade unions, even though the Task Force was not appointed by the government. The protests were supported by the Left parties.
Moreover, during the NDA-1 government, it was felt that the banks should go to the market and raise funds to maintain Basel-II norms. According to the book ‘Confessions of A Swadeshi Reformer’ by former Finance Minister Yashwant Sinha, the government introduced a banking bill in December 2000, proposing to reduce its share in PSBs to 33 percent. The Narasimham committee’s recommendation to privatise PSBs was already there. However, due to a great deal of protest, the bill was referred to the Standing Committee of Parliament and never ever returned.
Later, the P J Nayak committee, formed by the UPA government in January 2014, had also recommended that the government should get out of the ownership of banks by diluting its stake to less than 50 percent.
Performance of State lenders
A financial analysis of state lenders is necessarily required for the successful privatisation of PSBs. The number of state lenders have been brought down to 12 PSBs after several rounds of consolidation. Their financial position has improved. All PSBs have returned back to profits. Their combined profit has crossed Rs 1 lakh crore mark in the last financial year 2023. Nevertheless, 5 years ago in 2017-18, the total loss was Rs 0.85 lakh crore. Their gross non-performing asset ratio (NPA), according to the RBI, has also declined to a seven-year low of 5 percent.
At this moment in time, state lenders are well-capitalised and their capital adequacy ratio (CAR) is varying 14-20 percent. The government had provided capital support for the last time in 2021-22. The government was infusing capital to maintain CAR and in the course of the last five years from 2016-17 to 2020-21, the government has infused Rs 3.11 lakh crore for recapitalising banks.
On the other side of the stock market front, they are performing comparatively well. The Nifty PSU Bank Index has moved up to 42.7 percent while Nifty Bank index rose 14.2 percent and the Nifty 50 jumped to 4.3 percent during March 2022-23. However, the PSU Bank Index has fallen over by 13 percent in the red in March 2023. But now it is trading above the 200-day exponential moving average, suggesting that the long-term trend is bullish.
Roadblocks on the way
Although the government wants to speed up the privatisation process, it will not be so easy. The expected recession fears in world’s major economies, the ongoing Russia-Ukraine conflict and the global uncertainty due to rising pandemic cases can lead to volatile markets and would not be favourable for the present privatisation plan.
Privatisation will also be opposed by the employees of the banks. We have witnessed how employees of state lenders came on roads to protest the government proposal to privatise two state lender banks during Budget 2021.
The scheduled general elections of 2024 will also be an obstacle in the way of privatisation. There are 7.70 lakh employees in public sector banks and they are making the public aware of the effects of privatisation of banks. The ruling party has faced a crushing defeat in Karnataka elections, so the government will hardly take the risk of privatisation of banks before the election year of 2024.
Other than this, privatisation requires legislative amendments. The finance minister had also proposed to introduce the amendments in the budget session of 2021. Hence, the government has listed the Banking Laws (Amendment) Bill 2021 to make amendment to the banking companies (Acquisition and Transfer of Undertakings) Acts of 1970; 1980; and incidental amendments to the Banking Regulation Act of 1949; to remove the hurdles and to pave the way for the privatisation of these state-run banks.
Nevertheless, till now, there has been no progress in the process of privatisation of these PSBs. Even the bill has not been introduced in the Parliament yet.
Way forward
The selection of banks would not be an easy task. Therefore, it should be based on the block using interest from potential investors. We have seen this in the case of LIC, in which, the government targeted dilution of its 5 percent stake was unlikely, forcing it to reduce it to 3.5 percent due to the volatile market. The same situation still exists. Therefore, the government should follow the same IPO route or further public offering (FPO) to the public for subscription to dilute its stake in PSBs, instead of strategic disinvestment to transfer of management control, as it did in the case of Air India and Balco. The learning from the LIC stake sales will be helpful to improve the privatisation strategy. Besides, the policymakers must learn that privatisation is not a panacea to address all the issues of banks, but should be used as a means to increase the efficiency of banks.
Vinay K Srivastava is the author of Privatisation of Public Enterprises in India and teaches Finance at I.T.S Ghaziabad. He writes regularly on political economy and economic policy issues. He tweets from @meetdrvinay. Views expressed are personal.
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