Two public sector banks and one general insurer are to be privatised. It marks a big shift in approach, because privatisation of banks has been a politically tricky issue. A large unionised workforce will oppose it and none of the political parties have a constituency within that believes in privatisation. Therefore, the signal on privatisation through the Budget by the Narendra Modi government is very positive. There’s a catch, though. Earlier attempts at privatisation show that just intent isn’t enough to pull it off. Intent needs to be backed by sound strategy.
India’s public sector banks have seen change in the last three years after the government tried to build scale through mergers, and also bring a wider geographical footprint under each bank. After three rounds of consolidation public sector banks have shrunk from 27 in March 2017 to 12 in April 2020. Now, two are to be privatised. This presents a tricky situation as the government doesn’t want to exit commercial operations in the financial sector. It’s been identified as a strategic sector where the government wants to retain a “minimum” presence.
It may be tempting to retain the better run and profitable public sector banks and try to sell the weakest. Such an attempt is unlikely to succeed. For example, the attempt to sell Air India three years ago didn’t attract a single bid, because the attached conditions were unattractive. Poor management of banks may have rendered the weakest of them unattractive for any buyer. If the government’s aim is to restrict its presence to a bare minimum, it’s best to begin privatisation with sounder banks. Bids shouldn’t be restricted to Indian buyers as foreign banks have been present in India for long. It’s important to make a good beginning.
This piece appeared as an editorial opinion in the print edition of The Times of India.
Top Comment
Ashok
11 minutes ago
For both sound commercial and perhaps historical / sentimental reasons, SBI is the only PSB the government needs to retain. Viewed objectively, there is hardly any sector / industry in which a government owned entity is now indispensable. Either to ensure adequate competition or consumer welfare. If they did not exist, would the government today feel the need to start an airline or a telecom firm. 2. Given the always slender profitability of airlines, the massive hit due to the pandemic and the accumulated losses / legacy costs of Air India, one cannot be certain that the sale will go through. 3. The government has effective regulatory control over the banking system through the RBI. CRR is a safety issue. However, SLR, priority sector lending targets, even as farm loan waivers are a permanent fixture, more recently MUDRA, these are all forms of financial repression. Meant to provide the government first, preponderant claim over household savings. The focus should shift now to grant of new banking licences, creation of banks for which the HDFC group can serve as an inspiration, ensuring that the credit needs of an economy growing at upto 8% are adequately met. PSBs are yesterdayâ s story.... Read More