Privatising India's dozen public sector banks (PSBs) has been an unkept promise. Time and again, both the United Progressive Alliance (UPA) and the National Democratic Alliance (NDA) have flashed this as the top reform agenda. But beyond that, nothing happened. What lacked was sheer political will.
PSBs are dominated by heavily politicised employee trade unions. There was a large stock of toxic assets on their books. Besides, there needed to be a credible buyer who would be willing to experiment with deep rooted legacy issues in these banks.
All that has happened so far is a mega merger of 10 state-run banks into four in 2020 and a forced buy of IDBI Bank using India's largest insurer Life Insurance Corporation of India in 2019.
Now, once again, the government is preparing to push the PSB privatisation agenda. As The Economic Times reported, the government is likely to introduce amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, during the monsoon session of parliament to enable full divestment of its stake in PSBs.
Why this Bill now?
It appears the government wants to bring in an enabling law that will mean it can exit entire holdings from PSBs. For a prospective buyer looking at buying out a bank, this proposed law will be a positive factor. According to a senior banker at a government-owned bank, one reason why the government has come with this bill at this point is feedback from some potential investors.
That doesn’t mean there are commitments from any of the investors, the banker added.
Nevertheless, the government wants to kick-start the process afresh and attract suitors.
How likely the government is to get a buyer this time around?
Actually, the chances are better.
The bad bank, an entity set up to absorb stressed assets of banks, has finally come into existence. Once the chronic debt cases move to the bad bank, PSBs will have a much cleaner book, an issue that bothered investors in the past.
But, still, two key hurdles remain:
One, bank employees unions continue to be a dominant force in PSBs. They are hard against privatisation and argue that the move will be regressive.
Challenging the trade unions won't be easy. These outfits -- backed by political parties -- are powerful factions and can mount considerable resistance using their clout.
Two, even though the existing stock of NPAs (non performing assets) is cleared, the fundamental culture that created unhealthy lending habits remains. These banks continue to operate with a 'sarkari' approach, meaning they still take orders from top babus in government on key business decisions.
Changing that culture into a fully professional, board driven bank will be a challenge particularly at a time when competition from private and foreign players and a new crop of small banks and fintech companies is intensifying.
Beyond introducing an enabling legislation, the government needs to exhibit strong political will and resolve to walk the talk on privatisation.
(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)