Privatisation of PSU Banks – A time that has come?

De-nationalisation..

The 19^th of July, 2020, marked 51 years of nationalisation of 14 major banks. And, on the 20^th of July, there were reports that the Government plans to privatise the PSU Banks that were left untouched in the  recent merger wave. These banks are Bank of India, Central Bank of India, Bank of Maharashtra, UCO Bank and Punjab & Sind Bank. After the privatisation of these banks,  there would be only 5 large PSU Banks left, namely State Bank of India, Punjab National Bank, Union Bank of India, Canara Bank and Indian Bank. I had written about these mergers in  my earlier blog and had ended the blog wondering on the fate of the banks that were left out in the merger and consolidation wave.

Down memory lane…

While reading the news in the media on the proposed privatisation, I was taken back to my childhood. My family was financially deprived in those days and my parents had to struggle a lot to bring up and educate their five children. We were so thinly stretched money-wise, that even a small extra expenditure like buying a geometry box for school, posed a challenge. It would lead to my mother selling off one by one,  the brass and copper vessels that she had got from her parents on her marriage. These were here meagre possessions, apart from a little gold jewellery which she had stowed away for her daughters. When her children came up with a requirement from their school needing such extra expenditure, she would examine these vessels and decide which was the most dented or most used, that would not improve even with rigorous polishing or mending. She would then go to the nearest scrap dealer and sell those vessels, to get the money to cover the extra expenditure.

Trying to make ends meet:

The Government is doing exactly what my mother used to do. The fiscal deficit gap is widening, tax collections are below expectations and public expenditure is mounting, more so due to the Covid impact. The Government has looked at the ‘dented vessels’ it has, in the form of PSUs including these non-profitable banks with large NPAs. It had tried reviving these banks the in the past by injecting fresh capital worth Rs.2.11 lakh crores in 2017. The large defaults and scams- Bhushan Steel (Rs.45000 crores), Kingfisher Airlines (Rs.9000 crores), Nirav Modi (Rs.11,500 crores) and many such case, have led to further denting of these banks.

The looming gaping hole in balance sheets:

The Government knows that post-Covid, especially after the moratorium impact, these banks would have an even larger NPA hole in their balance sheets. Please see the table below, which has been taken from the Financial Stability Report published by RBI on July 24, 2020. A total of 67.9% of the amount of lending to Corporates which is 66.6% of  the total Corporate borrowers of PSU Banks have opted for Moratorium. It remains to be seen as to how much of the money lent will come back to the banks after the Moratorium is lifted. It is indeed a scary picture.

In his speech titled ‘Indian Economy at a Crossroad: A view from Financial Stability Angle- at the 7th SBI Banking & Economics Conclave organised by the State Bank of India  on July 11, 2020, Shri Shaktikanta Das, the Governor of Reserve Bank of India  said “The economic impact of the pandemic – due to lock-down and anticipated post lock-down compression in economic growth – may result in higher non-performing assets and capital erosion of banks. A recapitalisation plan for PSBs and private banks (PVBs) has, therefore, become necessary.” 

Pros and Cons of the move toward privatisation:

Who will buy these banks? Are these banks attractive enough for private players, even institutions? The cons far outweigh the pros, as given below:

From market reports, I gather that a few PE funds, some of the ambitious and successful private banks as well as some shadow banks may be interested in buying stake in a few of these banks.

Legal clean up needed before the sell off:

Even before the sale to private parties, and the Government needs to overcome some legal hurdles.

a) Amendment to Bank Nationalisation Act, 1969: These banks were nationalised under this Act. As such, the Government would need to amend the Act to enable the selling of its stake. The amendment would need to be cleared in both the Houses of Parliament, where the opposition is highly likely to oppose the move. It remains to be seen whether the Government will use the ‘Ordinance’ route rather than getting the proposals cleared in both the Houses.

b) Ring-fencing retirement funds of the employees:  The pension funds of these banks will need to be ring-fenced so that the retirement benefits of the employees of these banks, is not impacted in case the banks fail even after privatisation.

c) Court cases: The  Government may need to battle the Unions who may approach the Supreme Court fearing mass retrenchment post privatisation. There could also be public interest litigation by interested parties. In India, cases in Court could mean long, inordinate delays in execution of plans.

Assuming these hurdles are overcome and the banks are privatised, the parties buying stakes in these banks are likely to face the following challenges:

1. Liquidating stressed assets: Liquidating the stressed assets in a timely manner and recovering whatever is recoverable. The meandering pace at which IBC  proceedings are going, it will take a long time for the new owners to recover anything. There could be more skeletons in the cupboards in these banks that could come tumbling out, post privatisation.
2. Upgrading technology: Most of these banks have not gone in for any major technology upgradation over the last few years. The new stake owners will have to look at a major cost in upgrading systems or merging them with their existing system, if any.
3. Managing employee cost and industrial relations : Employee morale is already low in these banks and will be further impacted if there are mass retrenchments. Schemes like Voluntary Retirement, part time, contract jobs, work from home etc would help.
4. Skilling the employees mentally as well as professionally :  Training, coaching and mentoring would need to be done so that the workforce in these banks are geared to work in a competitive and fast paced environment.

Is privatisation the panacea for revival?

In his recently launched book Overdraft: Saving the Indian Saver, Urjit Patel, the former Governor of RBI, points out that everyone has been responsible for the mess including the Government which didn’t question excessive lending by the banks it owns, and Regulators who woke up late to problems and then told themselves, “this time it is different”, as also the financial media which routinely gave away banking awards to lenders pulled up by the RBI. He holds a mirror to RBI supervision by saying that supervision teams felt the “Stockholm Syndrome” and came “up with mitigating explanations for not recommending apposite strictures and penalties commensurate with transgressions that have been brought to light”.

The moot question is, will these banks become profitable even a few years after the change of ownership? If privatisation is indeed the panacea for the loss making public sector banks, then all private sector banks should be financially sound today. One look at the results of the old and new private sector banks today, indicates that it is mainly the lending and investment decisions  and not the ownership pattern that makes or breaks a bank.

A politico-financial need?

While the nationalisation back in 1969 was done for political expediency, the current intent of privatisation seems to be also in the same genre i.e. a politico-financial need. The Government doesn’t have the means and also doesn’t want to put precious tax payers’ money to capitalise these banks again. At the same time, shutting down these banks would lead to a political hara-kiri for the ruling party. So the only option seems to be to sell these banks to whoever may want to buy them. This sell-off is also a political gamble, but the risks are far lesser than letting them wither away.

And then, there were five PSU Banks…

The thinking in the corridors of the  administrative machinery of the Government is that the ideal number of PSU Banks should be five. For a population as large as ours, where one fifth of the numbers are living with meagre means and need Direct Benefit Transfers (DBT) and other government concessions, what is the logic behind having only five public sector banks? Also, what happens to financial inclusion and welfare projects that need to be government driven like farm loans, directed lending etc.? That brings me back to my dented vessels story. They intend to sell it because they need the money. Badly.

In conclusion:

 It is high time the PSU Banks,  are freed from the clutches of the Bureaucracy, where every major decision, right from selection of MD, ED and other senior promotions, to other important lending and investment decisions, need to be have concurrence of people in the  Government administrative machinery, who have no working exposure to running banks.  What is badly needed in these banks is  a senior management team with sharp business acumen, clear lending practices and policies,  good governance skills, strong risk mitigation measures and most importantly, the freedom to say ‘NO’ or to suggest alternatives, to the pressures of  the Bureaucracy. These banks should be allowed to hire professionals from the market to drive these banks back into a recovery and growth trajectory.

While it seems that it is the  financial emergency that is triggering the privatisation rather than a need to make the whole banking sector robust, it remains to be seen as to whether the government machinery would like to relinquish the power they have got used to, in controlling these banks and whether there will be any credible buyers for these ‘dented vessels’.

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