After the announcement on selling its entire 45.48% stake in IDBI Bank and divestment of two public sector banks (PSBs) in last year’s Budget, there was no news from the government this time. 

This is also the first budget in seven years where the government hasn’t footed the bill of capitalising PSBs. When the two aspects are seen together, there’s perhaps a hidden message - from merely selling stakes in PSBs, the focus is shifting towards bumping up the valuations and then selling them. 

In the last two years, even private banks haven’t had success in raising capital at a premium to market prices. Whether YES Bank, Lakshmi Vilas Bank or PMC Bank, the RBI was forced to think out of the box to resolve the crises, simply because of the dearth of willing investors for the tried and tested options.

There’s another interesting inference. 

Despite a certain section rooting for corporates to own banks, the government seems to have respected the thought process of the RBI, which hasn’t warmed up to the participation of Corporate India as major stakeholders in banks. 

So, the only road to finding buyers for PSBs is to ensure that their standards match that of the private banks.

FY21 was a year of turnaround for PSBs and the good spell continued till September quarter of FY22. Capital adequacy across all PSBs is well above the regulatory 8% threshold and most of them are a juncture of returning handsome net profits with a reasonable portion of it accruing from loan growth. 

That said, they have also extended several dispensations to borrowers during the pandemic. Adjusted for these, the strength of their books will be tested in FY23.

Another possibility also opens up. Bank mergers - Round 3. 

2019’s exercise of shrinking 10 PSBs into four has beefed up the ecosystem in terms of scale and processes. Given that there aren’t takers for smaller and/or weaker banks, another round of merger where those such as Bank of Maharashtra and Indian Overseas Bank could be folded-in to create four of five regionally strong PSBs will help shore up valuations, post which their bargaining power would be much better.

In fact, despite a sharp run-up in stock prices, markets still refuse to ascribe even the book value to PSBs. This indicates more ground needs to be cleared with respect to governance and risk management . Now, with the government’s focus back on infrastructure spending, how well PSBs can refrain from committing the mistakes of 2010 – 2012 is the question. 

As shareholders, it will be a tightrope walk for the government. But if successful, the aspiration to retain 26% stake and allow the rest for institutional and public participation could well materialise.