Union Finance Minister Nirmala Sitharaman has initiated something that her predecessors shied away from doing for too long - privatisation of Public Sector Banks (PSBs). By announcing the specific plan to cut stake in two more PSBs in the Budget speech, Sitharaman has made her intent loud and clear and has set the ball rolling.
That, undoubtedly, is the biggest takeaway for banking sector in Budget 2021. Unveiling the divestment strategy, Sitharaman said the government will privatise all entities except in four sectors which will be tagged as strategic sectors. Even in those sectors, the government will keep to minimum ownership, the FM said.
In the banking sector, besides IDBI Bank, the government will cut stake in two more banks and one general insurance company, Sitharaman said in the Budget speech. This statement is significant in many ways. One, it shows the Narendra Modi-government's commitment for bold reforms. Two, if implemented successfully, the government is facilitating more private sector participation in the key sector.
Remember, privatisation of banks has been promised long by successive governments but there has not been much of a progress. This time, the government appears to be serious about the plan. PSU stocks have rallied post the announcements as investors cheered the proposal. Privatisation of PSBs has not been taken by governments also because this is a politically sensitive decision. Government will have to face the wrath of powerful trade unions which have strongly opposed the idea.
Government has an overwhelmingly huge presence in state-run banks ownership. Experts have opined that this cannot continue for long as government has no business to be in business.
Consider this: Presently government holds over 70 per cent stake in at least ten banks as on December, 2020. There are eight banks where government holds over 80 percent stake and in three banks, the government has ownership of over 90 per cent stake. These are Indian Overseas Bank, Uco Bank and Bank of Maharashtra.Privatisation has been argued as an effective way to bring in more market competition, bring in private capital and enhance the operations efficiency of the sector.
On Monday, after the FM announcement of divestment in two more banks, global rating agency Moody’s said the decision will augur well for the sector.
“The government’s divestment of stakes in two public sector banks (PSBs) is credit negative for the banks involved, as it will reduce ongoing government support for them. Nevertheless, privatization can make those banks more market oriented, which will be positive for the industry as a whole,” Moody’s said.
Sidhharth Purohit, a senior banking analyst with Mumbai-based SMC Global securities, too said decision to cut stake in public sector banks is highly positive from a reforms-point of view. “In the past too, we have heard similar announcements. But this time, the government has announced in the budget which shows a strong intent,” said Purohit.
Having said that implementation of the divestment plan is key. Back in 2014, an RBI panel headed by P J Nayak, submitted a report recommending that government should exit ownership in state-run banks. But, the report has been largely ignored with respect to the privatisation part.
Comes the money, but not enough:
Besides the announcement on privatisation, the next big top priority item for the banking sector was the amount government earmarks for capital-starved PSBs. In the Budget, Sitharaman announced Rs20,000 crore for the fiscal year 2021-22. In the FY 2020-21 so far, an amount of Rs 5,500 crore has been infused by Government as fresh capital in PSBs through non-interest bearing special securities. Government has also infused capital through issue of bonds in 3 other banks namely IDBI (Rs 4,557 crore), EXIM Bank (Rs 5,050 crore) and IIFCL (Rs 5,297.60 crore), Sitharaman said.
The announcement of Rs20,000 crore has come as too little for PSBs which, according to Moody’s, require around Rs2 lakh crore capital over the next two years to provide for bad loans, meet regulatory requirement and resume lending to large borrowers. “The support to the banks for additional capital of Rs 20,000 seems small given the issues but divestment of the non-performing banks may compensate for that,” said consulting firm Ernst and Young in a note on Budget.
Indian government has infused Rs3.16 lakh crore in PSBs over the last few years. In the last Budget, the government didn’t announce any capital infusion for banks.
Bad bank—a big idea, finally!
The third critical announcement for banking sector is the creation of an asset reconstruction-asset management company announced in the Budget by the FM. This entity, called as a ‘bad bank’, will give a big reprieve to NPA-ridden banks by absorbing the toxic assets and freeing them to pursue fresh lending. The bad bank idea has been supported by senior bankers and other financial sector experts citing that the idea will help for quicker bad asset resolution. The recovery through debt recovery tribunals and Insolvency and bankruptcy code (IBC) mechanism has been limited to only a few large cases. A bad bank could help in better bad loan resolution through an ARC model. In May 2020, when the IBA submitted its proposal to a government but the concept didn’t take off at that point.
Overall, the FM has offered a reformist blueprint for the banking sector in 2021 Budget, especially with respect to the privatisation agenda. The success of it will, however, depend on the execution of the plan.
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