Further privatisation of banking sector feasible, but needs more than 10 years, say experts

File image of an IDBI Bank branch facade (Representative Image)

Privatisation of all government banks in India is feasible and even desirable considering certain challenges, but the entire sector being in private hands is an eventuality that is at least a decade down the line, said analysts, senior bankers and several other banking experts.

According to various recent media reports, the government may come up with several amendments and introduce a bill in the upcoming monsoon session of Parliament to facilitate the privatisation of state-run banks. Even the government completely exiting the banks being privatised is a probability, reported several news organizations.

Why the government is focusing on privatisation

According to various government sources, be it banking or other sectors, the government is likely to focus on privatisation as it steps away from populist policies. The government will take all possible measures to ensure that the country doesn’t end up being in deficit financing mode and privatisation could be one of the best ways out, said a government source, requesting anonymity.

“Theoretically, it is absolutely possible and there is no harm in doing that. But the important part will be regulation as public sector banks (PSBs) have deeper penetration in rural India as well in terms of deposit and lending facilities,” said Deven Choksey, analyst and managing director, KRChoksey Holdings.

Senior bankers pointed out that privatisation may even open up more employment opportunities in the sector. “There has been talent drainage in PSBs as many young bankers prefer private jobs over these government jobs because the PSBs fail to offer competitive market-related salary,” said a senior public sector banker, also requesting anonymity.

Many other senior bank officials agreed with this assessment. But in the private sector, there might be some concern over job security but there won’t be a situation of more work with less pay, they said.

Efficiency not the cause

Experts pointed out repeatedly that it would be wrong to claim that private banks are more efficient, rather, there have been instances when PSB intervened to support a private bank.

“NPAs (non-performing assets) have been disproportionately high even in private banks. NPA is the reflection of the economic system and whenever there will be stress, NPAs would go up,” said Naresh Malhotra, an ex-banker from the State Bank of India and resolution advisor at India Debt Resolution Company Ltd (IDRCL).

On the other hand, experts said, privatisation will help the government reduce expenses and lead to a level playing ground for all banks, unlike now. “Every year, PSBs ask for money from the government. The government tried some reforms but none of them helped much,” said Vinod Nair, a banking analyst.

Long-term planning needed

As pointed out by analysts, the government should not ideally be in any business but be focused on the governance and regulatory parts. But the process of total privatisation needs a timeline of 10 years or more, they said.

“We are a developing nation, so we need the intervention of the government in the banking sector. India has a record of private banks collapsing in the past. Even big corporates default, at times,” said C H Venkatchalam, general secretary, All India Bank Employees Association.

Analysts and senior bankers agreed that the Reserve Bank of India needs to bring proper enforcement of regulations before privatisation happens. “The urban market will be saturated. So there needs to be regulation in place that will help spread the banking business further, even if privatisation happens, by penetrating into rural areas,” added Malhotra of IDRCL.

One of the major reasons for having a timeline of 10 years or more is the inability of the government to meet its disinvestment target year after year. Whether the government will plan faster privatisation of banks will also depend largely on how successful the government is in selling its stake in IDBI Bank, added the experts. The Department of Investment and Public Asset Management has been holding roadshows for the stake sale, and is expected to call for bids by the end of the month. State-owned Life Insurance Corporation of India (49.2 percent) and the government directly (45.5 percent) are the largest shareholders in IDBI Bank, which has to be diluted to 26 percent.