It is often stated that the government should not be in commercial business and hence privatisation of public sector entities has now become a part of the reforms package. While this is a strong argument, the corollary should be that the government should not be relied upon to bring about growth through spending, which is the forte of the private sector. However, in India, it is assumed that the government should be the driver of capex and all discussions on the Budget are not on the social but commercial aspect.
But when we talk of privatising banks, there is an issue of ideology. Nationalisation of banks was to serve a social purpose that will never be taken up by the private banks that work on the RoNW (Return on Net Worth) concept, howsoever warped it may be. Hence the decision of the government to privatise two public sector banks is a very bold move which lays the roadmap for a series of such measures. If ideology has really changed today, logically all PSBs should be prepared for this metamorphosis.
It is still a guessing game as to which banks will be privatised. There is the merger of several banks already in progress, and while balance sheets have been combined, there is still work in progress when it comes to reorganisation. Therefore, the candidates are more likely to be outside this fold of big banks. Quite clearly, there are two reasons for doing this:
First, these banks are relatively less strong compared to the merged banks, which is good to begin with as an experiment as the same template can be used for other sales.
Second, the government does not want to support them with continuous capital infusion. A lot of money has already been infused by the government either directly through the Budget or the recapitalisation bonds route.
Intuitively, if these banks are less strong, they will not be able to raise money in the capital market as the valuation would be really low. Therefore, the government would be looking at either getting in another bank (private or foreign) to buy these banks or have some PE funds dig into them. One can guess that this will not be a case of another public sector behemoth buying them, which would not really mean privatisation as was the case with the last such sale of a PSB. But such an action also cannot be ruled out that gets in the disinvestment proceeds for the government and also helps to maintain a status-quo position.
Now why should a bank be interested in buying a PSB? All PSBs have solid infrastructure and expertise in the banking business and hence an acquisition provides a large platform to the buyer. There are branches, technology, ATMs spread across the country, and skill-sets etc which come readymade. Therefore, any foreign bank, for example, which wants to scale up in India, will find this offer very attractive. In fact, the problem with PSBs has been not that decisions are not right, but often that they are forced from above. Loan melas, phone banking, shamiana banking are all euphemisms used to explain how loans have been given. Hence letting go of government control fully should ideally make any bank efficient and, therefore, should be welcomed.
In fact, curiously, if taken to the logical end of privatising all PSBs, the entity to be affected the most will be the government as these banks have been used to carry out political agendas since 1969, which will not be possible now. Banking is commercial business; at the end of the day; banks make money on deposit holders’ money and not on share capital. While inclusive banking is mandatory according to RBI guidelines, often social programmes like Jan Dhan, affordable housing, loan waivers, MUDRA loans, etc, may not stand the test of commercial viability, but have to still be undertaken by PSBs.
Therefore, the move to sell them fully is audacious if carried to all banks, as they would then be functioning just like the private banks with independent governance structures. This also means that all appointments of Board members and management will be based on factors other than government diktat. And this is just what critics have been arguing for!
But why are bankers complaining? Here there is a problem for sure because the Unions are cognisant of what happens when bank mergers take place, or any bank buys another one. All acquisitions are based on creating the notional value for shareholders, which often means that there will be a serious look at the cost structure and given that the employee cost is the dominant one, rationalisation is a genuine threat. For PSBs, wage cost was around 60% of operating expenses in FY20, while the same for private banks or foreign banks was 37-38%.
Hence, the fear is palpable. The government has assured the staff that their jobs would be protected, which is assuring.
However, from the bankers’ perspective, once privatised, there is nothing to stop the staff from being rationalised through VRS programmes, which, as seen in some of the leading private sector banks, has always been a compulsory separation. Even when RBI enables bank mergers, terms and pay are protected only for a fixed period of time, which can be no more than three years. To assuage such fears, a way out would be to give a written guarantee to all staff that their tenures and scales are protected till retirement. This, however, may not be acceptable to the buyer of the bank. The fact is that when people choose a public sector job over a private sector one, there is a tradeoff between security and pay, which should be respected.
This would be the right time for the government to also create such templates for privatisation so that there is a smooth transition as PSBs are sequentially privatised. One can assume that this would be the long-term plan for the government or else selling just two banks would send different signals. Also, it is assumed that this privatisation will not be in baby steps where the government keeps selling only part of its stake to begin with while retaining majority control. That would only be kicking the can.
While the size of the banks that are to be privatised would tend to be relatively smaller, the creation of such models should be easier. The bigger questions would remain as to which banks would like to acquire these PSBs. As the government has shown a lot of urgency in implementing all the policies announced in the Atmanirbhar Bharat package, it may be expected that these two exercises would be completed within the financial year 2021-22. The amounts involved may not be very large in the overall scheme of Rs 1.75 lakh crore. The year 2020-21 was exceptional and hence the three very big-ticket disinvestments could not proceed. There is hence a greater 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 personal