It is usually stated that the government really should not be in industrial enterprise and therefore privatisation of public sector entities has now grow to be a aspect of the reforms package. While this is a robust argument, the corollary really should be that the government really should not be relied upon to bring about development by means of spending, which is the forte of the private sector. However, in India, it is assumed that the government really should be the driver of capex and all discussions on the Budget are not on the social but industrial aspect.
But when we speak of privatising banks, there is an problem of ideology. Nationalisation of banks was to serve a social goal that will under no circumstances be taken up by the private banks that work on the RoNW (Return on Net Worth) idea, howsoever warped it may well be. Hence the selection of the government to privatise two public sector banks is a pretty bold move which lays the roadmap for a series of such measures. If ideology has seriously changed today, logically all PSBs really should be ready for this metamorphosis.
It is nonetheless a guessing game as to which banks will be privatised. There is the merger of quite a few banks currently in progress, and even though balance sheets have been combined, there is nonetheless work in progress when it comes to reorganisation. Therefore, the candidates are more probably to be outdoors this fold of major banks. Quite clearly, there are two factors for carrying out this:
First, these banks are reasonably significantly less robust compared to the merged banks, which is great to start with as an experiment as the identical template can be utilized for other sales.
Second, the government does not want to assistance them with continuous capital infusion. A lot of cash has currently been infused by the government either straight by means of the Budget or the recapitalisation bonds route.
Intuitively, if these banks are significantly less robust, they will not be capable to raise cash in the capital industry as the valuation would be seriously low. Therefore, the government would be seeking at either acquiring in yet another bank (private or foreign) to invest in these banks or have some PE funds dig into them. One can guess that this will not be a case of yet another public sector behemoth purchasing them, which would not seriously imply privatisation as was the case with the final such sale of a PSB. But such an action also can’t be ruled out that gets in the disinvestment proceeds for the government and also aids to keep a status-quo position.
Now why really should a bank be interested in purchasing a PSB? All PSBs have strong infrastructure and experience in the banking enterprise and therefore an acquisition gives a big platform to the purchaser. There are branches, technologies, ATMs spread across the nation, and ability-sets and so forth which come readymade. Therefore, any foreign bank, for instance, which desires to scale up in India, will locate this supply pretty appealing. In truth, the dilemma with PSBs has been not that choices are not proper, but usually that they are forced from above. Loan melas, phone banking, shamiana banking are all euphemisms used to clarify how loans have been offered. Hence letting go of government manage totally really should ideally make any bank effective and, for that reason, really should be welcomed.
In truth, curiously, if taken to the logical finish of privatising all PSBs, the entity to be impacted the most will be the government as these banks have been used to carry out political agendas given that 1969, which will not be probable now. Banking is industrial enterprise at the finish of the day banks make cash on deposit holders’ cash and not on share capital. While inclusive banking is mandatory according to RBI suggestions, usually social programmes like Jan Dhan, reasonably priced housing, loan waivers, MUDRA loans, and so forth, may well not stand the test of industrial viability, but have to nonetheless be undertaken by PSBs.
Therefore, the move to sell them totally is audacious if carried to all banks, as they would then be functioning just like the private banks with independent governance structures. This also suggests that all appointments of Board members and management will be based on variables other than government diktat. And this is just what critics have been arguing for!
But why are bankers complaining? Here there is a dilemma for certain mainly because the Unions are cognisant of what takes place when bank mergers take location, or any bank buys yet another one. All acquisitions are based on developing the notional worth for shareholders, which usually suggests that there will be a significant look at the expense structure and offered that the employee expense is the dominant one, rationalisation is a genuine threat. For PSBs, wage expense was about 60% of operating costs in FY20, even though the identical for private banks or foreign banks was 37-38%.
Hence, the worry is palpable. The government has assured the employees that their jobs would be protected, which is assuring.
However, from the bankers’ point of view, after privatised, there is nothing at all to cease the employees from getting rationalised by means of VRS programmes, which, as noticed in some of the major private sector banks, has often been a compulsory separation. Even when RBI enables bank mergers, terms and spend are protected only for a fixed period of time, which can be no more than 3 years. To assuage such fears, a way out would be to give a written assure to all employees that their tenures and scales are protected till retirement. This, nonetheless, may well not be acceptable to the purchaser of the bank. The truth is that when individuals opt for a public sector job more than a private sector one, there is a tradeoff in between safety and spend, which really should be respected.
This would be the proper time for the government to also generate such templates for privatisation so that there is a smooth transition as PSBs are sequentially privatised. One can assume that this would be the extended-term program for the government or else promoting just two banks would send distinct signals. Also, it is assumed that this privatisation will not be in infant actions exactly where the government keeps promoting only aspect of its stake to start with even though retaining majority manage. That would only be kicking the can.
While the size of the banks that are to be privatised would have a tendency to be reasonably smaller sized, the creation of such models really should be a lot easier. The larger inquiries would stay as to which banks would like to obtain these PSBs. As the government has shown a lot of urgency in implementing all the policies announced in the Atmanirbhar Bharat package, it may well be anticipated that these two workouts would be completed inside the economic year 2021-22. The amounts involved may well not be pretty big in the general scheme of Rs 1.75 lakh crore. The year 2020-21 was exceptional and therefore the 3 pretty major-ticket disinvestments could not proceed. There is therefore a higher push from the Budget side on meeting these targets.
Chief economist, CARE Ratings, and the author of ‘Hits & Misses: The Indian Banking Story’. Views are individual