Banking Central | Is privatisation the lone cure to save weak PSBs?

In last year’s Union Budget the biggest headline-making event for the banking sector was the finance minister’s announcement on bank privatisation. The finance minister said the government plans to privatise two public sector banks. The announcement made news headlines, kicked off some discussions and, logically, irked bank employee trade unions. But, eventually nothing happened. The last we heard about this is when FM Nirmala Sitharaman said in Parliament that Union Cabinet has not taken any decision on the controversial issue.

"Consideration of various issues related to disinvestment is entrusted to the Cabinet Committee designated for this purpose. Decision by the Cabinet Committee has not been taken in this regard," Sitharaman said in December last year.

What are these issues? One major hurdle for the Centre to push PSB privatisation through is the strong opposition from bank employee trade unions. Powerful unions, which continue to have a big say in the affairs of the banking industry, have been strongly opposing the idea and even threatening a nationwide strike.

Certainly, the government wouldn’t want to risk antagonising the trade unions especially at a time when crucial elections are going to take place in different states. The government has learned its lessons the hard way from the farm protests.

The second issue will be finding buyers. Who will make investments in state-run banks with weak financials? Except a few big banks, there are no takers for state-run banks. The government will have to test the investor appetite before pushing smaller banks for privatisation.

Third, there is a fear among the bank employees about likely job losses in the sector when the privatisation happens. The government will have to find a credible explanation to those arguing privatisation will lead to job losses. It isn’t easy. The call is with the new owner. Given these factors, it is highly unlikely that the FM will push the privatisation agenda this time and invite more opposition.

To cut a long story short, so far it’s been all talk and no action when it comes to PSB privatisation.

So what can be done?

Considering the political and organisational risks, a better approach will be to make clear the government’s approach and bring forth a doable roadmap on privatisation instead of promising something that cannot be achieved. The government doesn’t need to put a number for the next year to implement privatisation. Instead, it can present a long-term roadmap to strengthen the existing private sector banks either through consolidation route or gradual exit of ownership.

The government needs to keep in mind that PSBs have been a key factor in bringing the unbanked into the fold of formal banking services. In many areas, they continue to be so. A question worth asking is how the mega consolidation exercise that was undertaken in recent years has changed the structure of the banking industry. While the size of the banks has increased—a factor generally seen as good in long-term growth and to augment banks’ ability to participate in bigger business deals—there have been many branch closures. This affected the access of rural, not so tech-savvy customers to bank branches.

According to data compiled by All India Bank Employees Association, post-merger, public sector banks’ branch network is reduced by 3,662 as against which private sector banks have opened 11,601 branches, small finance bank 4,863 branches and foreign banks 587 branches. The data also shows the market share of PSBs has fallen since then giving space to private banks.

No one can deny the fact that PSBs have played a critical role in expanding the reach of formal banking to unbanked rural areas while private banks largely limited their operations to city centres. Converting the PSBs to private banks in one go isn’t the solution. Instead, the government will have to chalk out a road map to strengthen these institutions.

(Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.)