Centre has shortlisted 4- mid-sized state-run banks for privatisation to further sell state assets. These are the four mid-sized state-run banks shortlisted by the government for privatisation: Bank of India, Bank of Maharashtra, Central Bank of India and Indian Overseas Bank.

According to a Reuters report, 2 of the shortlisted banks will be selected to come under the gavel for privatisation in the 2021/22 financial year beginning in April. The reports also indicated that the government will also move on to privatize some of the country’s bigger banks later. For now, only mid-sized to small banks are being considered for the first round of privatisation to test the waters.

Bank union estimates suggest that Bank of India employs a workforce of about 50,000 people, Bank of Maharashtra employs 13,000 people, Central Bank employs 33,000 staff and Indian Overseas Bank has a workforce of 26,000. The relatively smaller workforce employed by the Bank of Maharashtra can make it easier to privatize and thus, be in the priority list in the privatisation list.

Why the need for Privatisation?

Earlier this month, Finance Minister Nirmala Seetharaman announced in the 2021 Union Budget that 2 public sector banks along with a general insurance company will be privatized this fiscal. The need for privatisation comes from the fact that years of capital pumping and financial reforms have not improved the finances of public sector banks in a significant way.

A number of these public sector banks have a higher number of non-performing assets and stressed assets than private banks. The public sector banks also fall far behind the private banks on the parameters of profitability, market cap and dividend payment. According to an Indian Express report, the Indian government injected Rs. 70,000 crore into state-run banks in September 2019, Rs. 80,000 crore in the financial year 2018, and Rs. 1.06 lakh crore in the financial year 2019 through recap bonds. 2019 also saw the government merging 10 public sector banks into 4.

After the COVID-19 related relaxations are lifted, the banks are expected to report more NPA (non-performing assets) and loan losses. According to an RBI Financial Stability Report, the NPA ratio of commercial banks is forecasted to rise from 7.1% in September 2020 to 13.5% by 2021. This in a nutshell means that the government would need to again pump capital into the weakening public sector banks.

Additionally, private banks come with a better net interest margin (3.4% vs PSU’s 2.4%); lesser cost (wage bill with 8.7% of income compared to 13.8% for public sector banks) and thus, private banks can continue staying profitable while public banks have been bleeding money in the last 5 years.

In 2020, the private banks’ market share in loans has risen to 36% from 21.26 just five years back in 2015. The share of public sector banks on the other hand has fallen sharply to 59.8% from 74.2%. The history of private banks can be traced back to the 1990s when RBI allowed more private banks during the Indian liberalization phase. Private banks have expanded their market share with the help of new technology, better and reliable services and new products. To put this notion in perspective, one should just note that HDFC Bank which was set up in 1994 has a market cap of Rs. 8.80 lakh crore while state-run SBI has a market cap of Rs. 3.50 lakh crore.

Privatising small banks may not yield desired results

Meanwhile, economists are of the opinion that there will not be many takers for smaller weak state-run banks. These banks will also come with the burden of bad assets. Economists are suggesting that Prime Minister Modi’s government should consider selling bigger state-run banks like Punjab National Bank or Bank of Baroda as the sale of smaller banks will unlikely help the government raise money the way it desires to. Devendra Pant spoke to NDTV and said, “The government should consider what gives it a better pricing without compromising its long-term goal of financing the growing Indian economy.”