Recapitalization Through The IDBI Deal Lens

Much has been written about the specifics and mechanics of recapitalization of banks to dwell on it in any detail here. What has been left out has been an objective view of the need for recapitalization and – more importantly – what needs to be done subsequent to it to ensure that these banks, and the country, never ends up in the current situation. 

To get to the crux of the matter one must first understand that in an underbanked country like India there is utility in having Public Sector Banks (PSB). These banks serve the purpose of implementing government objectives of covering the poor segments of the society through savings & deposits accounts as well as supporting small businesses driven by these sections through access to credit. However, while there has been some measure of success towards this purpose, the truth of the matter is that most of these banks have ended up bankrolling borrowers who have used dubious financial statements to gain loans that they would never be able to repay. It has only been the unrelenting focus of the declaration & recovery of NPAs by the current government that the real picture has been forthcoming and corrupt businesses have felt the heat. But more importantly, it is the corrupt employees basking in the security of tenured employment and unionization who are now being brought to question and having to face up the heat. 

It is no secret that should the recapitalization not happen, banks would be unable to meet the Basel-III norms, or in a number of cases end up with negative net worth. Therefore, it is only time that the employees of these banks realize that if they do not forego corruption and at the same time up their game – both in terms of customer service and innovation – then there is a high likelihood of their employers going bust leaving them jobless. And this is not really difficult to do. In the past institutions such as HDFC, ICICI & UTI, to name the leaders, have successfully transformed the public sector organization into highly successful private sector corporations. These organizations have been typically characterized by successful leaders who have led them to unheralded heights, which has been the other potent ingredient in the mix. 

While IDBI has been a contrarian story, the current move of transferring ownership to LIC, an extremely successful public sector company, will lead to serving the same purpose and results as seen with the mentioned examples. This is a smart move by the government and it may behoove them to consider similar approaches not just for banks but also various other core sector companies. 

The government really does not have any business running businesses. While it would be ideal to have SBI continue to run as a government company to fulfil its social purpose, the government needs to consider the dilution of its stake through either privatization in the case of smaller and/or revivable struggling PSBs or to allow successful government enterprises to fold them in. This is a structure replicable across the entire public sector, and will provide handsome returns to the government both in terms of profits as well elimination of management headaches & crisis situations. A utopian scenario would be for the government to setup a central holding entity which would post facto be a sovereign fund with an investment portfolio across sectors, which in terms of diversity & size be the envy of most, and which within it would have the potential to delivery unprecedented profits. The government can use the IDBI template for cross-dilution to its more successful holding companies and the prevailing privatization model for other. 

If there is one government that can do this, it is this one, given its intent and majority. It is time that we got the government out of, as stated above, the business of doing business.