What public sector banks need is autonomy in operations. All government backed banks like HDFC Bank, ICICI Bank and Axis Bank proved that autonomy is all that is needed to make it a success.
What is it that public sector banks have that private sector ones do not?
The obvious answer is non-performing assets (NPAs). Think deeper and we reach the root cause of all the ills of public sector banks. The government, more specifically, government interference is what separates the two type of banks.
It is only because of lack of freedom, political pressure to allocate loans and over-the-shoulder policing that there is a mountain of toxic assets in public sector banks’ backyard. Not only has this resulted in ruining banks' balance sheets but has also prevented them from getting suitors.
According to reports Axis Bank, despite its poor showing, has managed to get a private equity fund willing to pump money into it. Axis Bank has, however, denied the news, but has accepted that it continues to explore various means of raising capital. The report also points out that other suitors may be interested in picking up stake in Axis Bank.
Irrespective of the financials, private sector banks do not seem to have a problem in raising capital. Private equity deals in recent times in the banking space have all been in the private sector space. Axis Bank in its earlier avatar as UTI Bank, promoted by government entities also managed to get private equity from ChrysCapital.
A part of the reason why public sector banks might not be forthcoming to let private equity players invest in them is because the PE players will come asking for board representation. Given the size of the investment, the PEs are, perhaps, in the right to demand a board seat.
Public sector banks, where the government holds more than 51 percent stake, do not let private equity players pick up a substantial stake which would dilute government holding. Unions and politicians would be up in arm if such a move is done.
Yet the present scenario offers the government an opportunity to make money out of the mess. The government has already announced its grandiose recapitalization plan. At the same time, it has set up a committee under Finance Minister Arun Jaitley to look into bank mergers. Both these moves will make banks stronger, but only temporarily.
What public sector banks need is autonomy in operations. All government backed banks like HDFC Bank, ICICI Bank and Axis Bank proved that autonomy is all that is needed to make it a success. Raising money is not so much of an issue if the bank is professionally operated.
Public sector bank officials are already well trained and can be as good as their private sector peers, provided they are given enough room to operate and incentivized enough. Unfortunately, today, public sector banks have become poaching grounds for private sector banks.
By giving autonomy the government can capitalise on its investment in the banks by divesting it at a later date. There is an opportunity to make most of a crisis. Shareholders would appreciate the increased autonomy and public sector banks would be re-rated.
Irrespective of the fact that Bain Capital or any other private equity firm has shown interest in Axis Bank, the fact shows that there is an appetite to participate in the India story, even if the investment is not best in class.Public sector banks with their penetration in smaller Indian cities, high deposit base and a higher share of corporate lending offer a chance to participate in the India growth story, though the banks are presently half-baked. The government has put in the money; it now needs to allow banks to manage themselves well in order to reap the benefits of its investments. Its action will decide who goes laughing all the way to the bank – shareholders or new set of defaulters.