Why Budget 2021 is a great chance for Modi govt to bite the bullet on PSU bank privatisation

Fiscal compulsions could drive privatisation, but there’s still a need to overcome hurdles created by labour laws and low valuation of public sector banks.

Representational image for public sector banks | ThePrint

New Delhi/Mumbai: After it merged 13 public sector banks into five, as well as the State Bank of India’s associate banks with the parent, it is now expected that the Narendra Modi government will take the first step towards privatising some state-run banks, in a bid to expedite long-pending reforms in the banking sector.

While privatisation of the state-run public sector units has been on the agenda of successive governments, with some degree of success, privatisation of public sector banks was never mooted — the possible exception being IDBI Bank, which was sold to the Life Insurance Corporation of India, which itself is fully owned by the government.

According to sources in the finance ministry, multiple options are being considered as part of the government’s eventual aim to bring down the number of state-owned banks to four, which could include merging some of the remaining smaller banks into one of the four larger banks, as well as privatising a few of the smaller lenders.

State Bank of India, Bank of Baroda, Punjab National Bank and Canara Bank are the four biggest state-owned banks after an earlier round of mergers, and are expected to retain their state-owned identity, sources said.

“There is a lot of talk about privatisation of public sector banks. The thought process is that some public sector banks — the six among the initial 19 state-owned banks that were not a part of the consolidation process — are not doing well, and may not be viable, so the government may come out with a framework to privatise them. There may be a framework, or there may be an indication towards that direction,” said Ashvin Parekh, managing partner at consulting firm Ashvin Parekh Advisory Services.

Different strokes for different banks

With the merger of 10 public sector banks into four in 2020, there are now 12 public sector banks in India. Some of the banks which were not a part of the merger are Bank of India, UCO Bank, Bank of Maharashtra, Central Bank of India, Indian Overseas Bank and Punjab & Sind Bank.

“Of the remaining 12 lenders, a few will be lined up for privatisation, a couple for merger with the four big lenders, and in the remaining banks, the government will gradually reduce its stake over a period of time through sale in the secondary market,” a finance ministry source said.

However, reducing stake in state-owned banks through the secondary market route is not a preferred option right now, on account of the low valuations of the stocks of these banks. Most of the stocks of state-owned banks are trading at a discount to their book value. The government is exploring strategic stake sales as an alternative.

Saurabh Mukherjea, founder and chief investment officer of Marcellus Investment Managers, said the fiscal compulsions are higher this year, which may push the government towards privatisation, though there are challenges around labour laws, quality of assets and valuations.

“The challenge, for the last 20 years, is that private sector bidders for PSU entities are few and far between,” Mukherjea told ThePrint.

“Part of the challenge is around the labour laws in the country, quality of the assets that are put up for sale, and part of the challenge has been around valuations. If the government can find ways to overcome these hurdles, then we are hopeful that we will see the beginning of a new privatisation drive,” he continued.

However, Mukherjea added that expectations of privatisation “are very familiar expectations going into a Budget”. “The fiscal compulsions are greater this year then they have been in the last decade. Perhaps they (government) will overcome the traditional obstacles that have hindered privatisation in the country,” he said.

Past attempts to reform sector

The governance reform of public sector banks was initiated in 2014 by setting up a Banks Board Bureau, and splitting the post of chairman and managing director of banks into MD-CEO and non-executive chairman. But not much has been done since then.

The P.J. Nayak committee set up to recommend bank reforms suggested that the government should distance itself from the public sector banks.

According to banking industry experts, governance reform of public sector banks is the need of the hour, as these entities have been losing market share to their private sector counterparts rapidly, particularly in the last five years. Between 2015 and 2020, public sector banks’ market share in advances plunged from 74.28 per cent to 59.8 per cent, while in deposits, the drop was from 76.26 per cent to 64.75 per cent.

Following Finance Minister Nirmala Sitharaman’s announcement last year about the government’s intent to completely exit non-strategic sectors and reduce its presence in strategic sectors to four entities, the Department of Investment and Public Asset Management had floated a cabinet note that was shared with all the relevant ministries.

The note had proposed categorising 18 sectors as ‘strategic’, and banking was among them.

However, it has been more than six months since the note was initially floated, but the proposal is yet to be taken up by the cabinet.

Speaking in December at an interaction with industry members, Secretary, Department of Economic Affairs, Tarun Bajaj had hinted that the delay was on account of the government trying to make the policy more ambitious. He had said the policy will have a detailed implementation plan as well.