The government announced bank privatisation plans with much fanfare in Budget 2021-22. Two years have passed, and there has hardly been any action. While Covid-19 and the ensuing Russia-Ukraine war created uncertainty in terms of market appetite, 2023 held promise after two years of inaction. There were expectations that this year the government would begin the process of privatising IDBI Bank.
The only action on it was cancelling the bidding process to hire an asset valuer for the planned IDBI Bank share sale. In all likelihood, the government will not be able to privatise IDBI Bank in this financial year ending March 31, 2024. Tuhin Kanta Pandey, secretary of the Department of Investment and Public Asset Management (DIPAM), said last month that the government did not expect to conclude the sale of IDBI Bank by the end of the current financial year.
Finance Minister Nirmala Sitharaman in her Budget 2021-22 had announced the privatisation of Public Sector Banks (PSBs) as part of the disinvestment drive to collect Rs 1.75 lakh crore. Lok Sabha Election 2024 is one of the reasons why the government has likely put its plans on hold. PSBs have also posted better financial results, which could also be a reason to push back the plans for privatisation.
“The government was very enthusiastic about privatising two banks in Budget 2022-23. So much that the required law to amend the bank nationalisation acts to enable privatisation was promised to be introduced in the same budget session. However, very soon, the government lost all enthusiasm. No bill to amend nationalisation acts was introduced in that session or thereafter in the last two years,” said Subhash Chandra Garg, former finance secretary of India.
The crucial Banking Laws (Amendment) Bill is yet to be tabled in Parliament, another factor because of which privatisation of banks cannot go ahead.
Is Better PSB Performance The Only Cause?
When the plan to privatise public banks was announced, the country was struggling to cope with the economic volatility caused due to Covid-19. Non-performing assets (NPAs) were on the rise for most of the PSBs. However, banks’ books appeared much cleaner by the end of the middle of FY 2023, thanks to large loan write-offs and central-bank-initiated asset quality reviews.
The combined profit of 12 Indian public sector banks (PSBs) in the second quarter of FY24 (for the July-September quarter) jumped 31% to Rs 33,643 which was previously at Rs 25,684 crore in the same period of last year. In the first half of FY24, the 12 PSU lenders posted a net profit of Rs 68,061 crore, an increase of 66% over the first half of FY23's net profit of Rs 40,991 crore.
“One of the major motivations behind privatisation of banks was the financial conditions of banks during that time. The financials of the public sector banks were not that good, so there was slight motivation on the part of the government to disinvest to improve their financials, but that motivation is not there anymore,” said Naresh Malhotra, a former State Bank of India (SBI) senior official who presently works as a banking industry consultant.
Better performance was one of many reasons for the government putting its plans on hold. The government did not address the regulatory constraints that had to be resolved. Necessary amendments under the Banking Companies (Acquisition and Transfer of Undertakings) Act of 1970 are required and issues like Labour Union protests could be one of the major consequences of privatisation.
Not just banks, but the government was less enthusiastic about privatising other non-financial companies like Bharat Petroleum Corporation Limited (BPCL) and Container Corporation of India Limited (CONCOR) as well. No action was taken to make the process of identifying the banks to privatise or other enabling action necessary to start the process. “I suspect there were two reasons for this, though the government never officially spoke about it. First, the government realised that it was not easy to privatise banks. Labour Unions were likely to protest creating situations like what happened in the case of farm laws. Additionally, who do you sell to as there are enormous regulatory constraints regarding who can own banks and so on. Second, the government shifted the strategy to invest more than disinvest/privatise, as a policy,” said Garg.
The improved asset quality was another factor that contributed significantly to putting bank privatisation on hold. Immediately after Covid, banks were struggling with rising NPAs. However, the provisioning for bad loans for the 12 listed PSU banks fell to Rs 16,552 crore in the second quarter of the current financial year compared to Rs 16,875 crore in the previous quarter and Rs 18,138 crore in the year-ago quarter. The gross NPAs, which were at Rs 10.21 lakh crore in 2018, have gone down to Rs. 5.55 lakh crore as of 2023.
“Not only the functioning of the PSBs in terms of profit has improved, rather their asset quality has improved significantly and on the capital front also, the banks have been doing considerably better,” said B N Mishra, the spokesperson for the Indian Banking Association (IBA).
One of the senior bankers currently associated with the IBA, requesting anonymity, said that the two major PSU banks that were likely to be privatised were the Indian Overseas Bank (IOB) and Central Bank. Both banks have performed well in the last few quarters.
IOB's gross NPA ratio improved to 4.74% in the second quarter of this financial year, from 10.40% for the quarter ending on December 21, right before privatisation was announced in Budget 2022. Similarly, for the Central Bank of India, gross NPA came down to 4.62% in the second quarter of this financial year from 15.16% in the December quarter of 2021.
Disinvestment Of Banks Not Same As Other Companies
The government completed the much-delayed privatisation of Air India which had been in the works for over two decades. The public listing of the Life Insurance Corporation was another key reform that the government managed to execute smoothly. Quick privatisaion of PSBs was therefore a naturally expected outcome. But the complications involved in terms of bank privatisation have made the government tread with caution and, unlike other companies, it is not possible to turn a loss-making bank into a profitable business within a short period.
“For a bank acquisition, the customers or the people associated with the banks and the culture of the banks is as important as the size of the balance sheet for the acquirer. The acquirer will focus on how good the bank is in terms of creating value for the shareholders,” said Varun Khandelwal, director at Bullero Capital.
The investors primarily focus on how much a bank could help them get a return on equity based on the lending. Apart from the State Bank of India, no other banks have been able to grab the interest of investors. IDBI’s privatisation failed particularly on this ground.
“IDBI had legacy NPAs, which have been eventually cleaned up but the problem is the culture of the bank remains the same. If we look at the Air India privatisation, the airline has ground staff, pilots, cabin crew and enough slots, but there were issues on the management front. Tata realised that those problems could be resolved and (Tata) was more than compensated for by the unique availability of slots Air India provided.” said Khandelwal.