“The case for divestment is now getting a little grey to me in terms of what banks need,” said KV Kamath, veteran banker and chairman of Jio Financial Services, speaking exclusively to Moneycontrol.
Without getting into specifics or taking names, Kamath said if public sector banks (PSBs) are self-sufficient when it comes to capital and can match their private peers on technological capabilities, the need for divestment by the government could be rethought.
“This (divestment) is a call that the government has to take. We need to look at what could be the need for divestment, which typically is large capital needs. Now, if these banks are self-sufficient in capital, you have to ask why divestment is needed. That's point number one,” he detailed.
He added that the reach of PSBs is far higher in comparison to private banks. “The second point is the sort of reach the public sector banks provide. Private banks do not provide that reach. We need to make sure that is there. Third and most important point is over the last few years, catch-up has happened on technology. I do not think that today, technology of a private sector bank is differentiated from what a public sector bank uses,” he said.
Whether private or public sector banks, Kamath is of the standpoint that technology adopted by them needs a total revamp. “In the banking sector as a whole, there's a case for complete revamp of technology. What technology the fintechs and the new players are building in can very easily be put into a bank and make the bank significantly more efficient,” he said.
While divestment, in his opinion, may not be critical, Indian banks have not seen a large equity raise since Yes Bank’s follow-on public offer in July 2020. Prior to this, Axis Bank raised over Rs 11,000 crore in 2017 through private placement which saw the participation of some marque investors such as Bain Capital.
“If a bank’s return on equity (ROE) is 15-20 percent, it is a perpetual cash or equity-generating machine. You don't need outside equity,” Kamath said, responding to a question on whether this concerned him.
“When you are at 10 or 12 percent ROE, then if you want to aspire to grow at 15 – 18 percent, you have to make up the gap somewhere. If you are generating nearly 20 percent ROE, then you've got all the capital that you need to grow. I call these banks perpetual equity-generating engines and they are good banks,” he elaborated. He also cautioned that banks wanting to grow beyond 15 – 18 percent it could be dangerous.
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