The Politics Of Selling Banks

While there have been a number of sick/bankrupt banks in the public sector, the case of the private sector is no good either.

As part of the 2021 budget proposals, the FM had said that while strategic disinvestment of IDBI Bank will be done during the forthcoming FY 2021-22, the government will also privatise 2 public sector banks and one general insurance company in FY 2021-22. She further said that necessary legislative changes will be brought in the current budget session itself, to enable such privatisation/disinvestment. Since then, rumours have surfaced that the two banks likely to be privatised, will be chosen from either Bank of Maharashtra/Bank of India/Central Bank of India or Indian Overseas Bank. Its an unconfirmed rumour, and the government’s stand is not known; whether it wants to sell its weakest PSBs or wants to offer those which are likely to attract a buyer, so as to kickstart its ambitious privatisation program.

It is certainly debatable whether privatisation of banks will cure the ills of the banking/finance sector, because while there have been a number of sick/bankrupt banks in the public sector, the case of the private sector is no good either, with the collapse of the likes of ILFS, DHFL, Yes Bank, LVB, PMC and mismanagement and corruption in ICICI Bank and others. But if you go by the twin metrics of build-up of NPAs and political meddling in banks/FIs, then the PSBs are clearly worse off than their private sector counterparts. Moreover, if PSBs are privatised, then the government is divested of its responsibility to bail out/recapitalise bankrupt banks, which has been a huge drain on public funds, with Rs. 3.57 lac crores lost in a recapitalisation in the past 5 years alone. It will stop the inefficient use of scarce public funds, will bring in greater accountability/transparency in the sector, will help to ease out the growing NPA crisis which is largely centred in PSBs and will release government investment for better/productive use.

While the guessing game of which are the two PSBs to be privatised next is on, there are numerous challenges that will delay the process and experience say that privatisation of a PSU is easier said than done.

1. Due diligence, ascertaining the actual financial position, and valuation.
2. Control premium versus past baggage being carried forward.
3. Political opposition and willingness to cede ownership/control.
4. Surplus staff and trade unions.
5. Getting a fit and proper buyer for the banks.
6. Legislative amendments can be delayed due to fierce opposition to privatisation.
7. NPA ridden sector, will not get an optimum valuation and the best pedigree buyers.
8. Past dismal government track record, in the matter of privatisation.

While it is prudent that the government retains a mere strategic presence in the banking sector, through at most 4 PSBs, and sells the rest, the fact yet is that these proposals/decisions to privatise are much more influenced by politics and less by economics and that raises a few questions :

1. Is the privatisation of a healthy PSB, by any chance meant to be a gift for the cronies of the ruling party?
2. Is the government finally tired/incapable of resolving the NPA crisis and sees privatisation as its solution, bypassing the burden to the private sector to handle?
3. Is the government testing the waters by privatising two banks and based on that experience will move ahead?
4. Are the netas and babus finally willing to cede their power?
5. With bank licences now to be available on the tap, is the government keen to make a hurried exit out of the sector, since investors would prefer to start afresh than with past baggage?

While the entire exercise of privatising is a financial/legal process, the entire decision is however political and that will decide how smoothly and time-bound privatisation turns out to be.