Some months back, NITI Aayog had recommended the privatisation of three public sector banks, namely Bank of Maharashtra (BoM), Indian Overseas Bank (IOB) and Punjab and Sindh Bank (P&S Bank). In her Budget speech, Finance Minister Nirmala Sitharaman announced that the government budgeted ₹1.75 lakh crore from stake sale in public sector companies and financial institutions, which includes two PSU banks. Though the Finance Minister did not give out the names of the two banks, they could be from these three. It would be the first time in the history of Indian banking that a public sector bank is being privatised.
Since these banks have unmanageable non-performing assets (NPAs, or loans and advances that are in default or arrears) and there are sufficient public sector banks in good shape, it is a wise decision to sell them off.
The total NPAs of IOB, P&S Bank and BoM stand at ₹19,912.70 crore (14.78 per cent of the bank’s loan portfolio), ₹8,874.57 crore (14.18 per cent) and ₹12,152.15 crore (13 per cent), respectively.
IOB, P&S Bank and BoM having Net NPAs (ie, after making provision from profit) of ₹6,602.80 crore, ₹4,684.15 crore and ₹4,145.38 crore and this comes to 5.44 per cent, 8.03 per cent and 5 per cent of their advances, respectively.
The business (deposits and advances) as on March 2020 were: IOB — ₹3,44,284 crore, P&S Bank — ₹1,48,078 crore and BoM — ₹2,36,921 crore.
As on February 1 2021, these banks had a market cap of ₹18,081 crore (IOB), ₹956 crore (P&SB) and ₹9,741 crore (BoM).
Implications of privatisation
The various stakeholders in a bank are its share-holders, customers and staff. All of them will bear the impact of privatisation.
Government as shareholder
When a bank is sold to a private entity, the government gets back its capital. The value of this capital depends on the market condition and the inherent strength of the bank like number of branches, customers, business mix, etc. In any case it cannot be less than the present market cap.
Once privatised, the government need not infuse further capital into these banks, which helps the government consolidate its fiscal position.
Government departments like the finance ministry, Central Vigilance Commission, etc, need not monitor and supervise these institutions, which saves manpower and money.
Since there are sufficient number of PSU banks in operation, there may not be any letup in implementing various government-sponsored schemes that require government banks.
As the new acquirer is likely to run the bank more efficiently with enhanced capital infusion, the market may give better value and benefit private share-holders. Ultimately, the shareholder value will be based on performance. We have seen the performance of HDFC Bank as well as Yes Bank. So we have to wait and watch this development as it unfolds.
There may not be any immediate change for the bank customers. But in course of time, they may get better service and may also have to pay more charge for the services they avail. Various non-remunerative services like collection of water charges, power charges, disbursement of pension etc. may be stopped. The bank may offer more non-banking services like mutual fund, insurance etc. to increase revenue.
Though the customers deposit insurance, the comfort and reliability level with deposits in a government bank will be absent.
The bank, under a private management, may reward workers based on their performance and non-performers may not have job security. Performance will also be measured based on profit generated and will not be simply activity based. The role of labour unions may be undermined. Job reservations for Scheduled Caste and Scheduled Tribe candidates may eventually go as these are not applicable for private institutions.
(The writer is a retired banker.)