PSBs privatisation: Guessing the list

Two public sector banks (PSBs) in India’s financial services sector firmament may come a full circle if the government makes good on the Budget announcement of privatising them.

Why full circle? Because prior to their nationalisation, which happened in two phases – in 1969 (14 banks) and 1980 (6 banks) – all PSBs were private sector banks.

Since the Budget announcement on February 1, various viewpoints have emerged as to which two PSBs could be picked up for privatisation.

Some experts say the six PSBs that were left out of last year’s mega-consolidation exercise could be on the government’s radar for privatisation. Others opine it could be two of the five large PSBs into which eight mid-sized PSBs merged in the last two years.

There could also be another dimension – the government may choose a combination of the aforementioned two possibilities.

Though Debashish Panda, Secretary, Department of Financial Services, has said that all PSBs are eligible for privatisation, in all likelihood, State Bank of India (SBI) will be kept out of this exercise as it the only government-owned bank that is classified as a domestic systemically important bank (D-SIB). The other two D-SIBs – ICICI Bank and HDFC Bank – are private sector banks.

The bid to privatise PSBs stems from the fact that the government is having to keep pumping in money year after year to help them meet regulatory capital as well as growth capital despite stretched finances.

So, the government’s move to have a bare minimum presence of public sector enterprises (PSEs) in strategic sectors, including “banking, insurance and financial services”, comes in the aforementioned backdrop.

The remaining Central PSEs in the strategic sector will be privatised or merged or subsidiarised with other CPSEs or closed, per the Budget.

Since 2017-18 and till date, the government has infused capital aggregating ₹2,56,943 crore. Of the recapitalisation provision of ₹20,000 crore for FY21, ₹5,500 crore has been provided to Punjab & Sind Bank. The balance ₹14,500 crore has not yet been allocated.

Suppressed market valuation

Karthik Srinivasan, Group Head - Financial Sector Ratings, ICRA, said the current suppressed market valuation (of PSBs) makes it tricky as to how much the government will be able to raise from disinvestment.

And given the very low market capitalisation of many PSBs, unless the government dilutes a significantly large stake, the effective money it can raise is not going to be meaningful.

Srinivasan observed that if the government has to sell a significant stake in PSBs, it will also need to have the Reserve Bank of India (RBI) on board because of the regulations relating to (cap on) single party shareholding in banks.

Not selling family silver

In her address at a conclave in Mumbai February 7, Union Finance Minister Nirmala Sitharaman rebutted Opposition charge that disinvestment/ privatisation of public sector enterprises (PSEs) is akin to selling family silver.

“This (disinvestment/ privatisation) needs to be seen in the correct perspective. It is not, as the Opposition says, a case of selling family silver. Not at all. Family silver should be strengthened. It should be your taakat (strength). “To prime the PSEs is the only aim of our policy. You need them, you need them to scale up, you need them to be in maximum potential so that they meet the aspirations of growing India,” said Sitharaman.

She emphasised that the logic of bare minimum presence in the strategic sectors is that the government enterprise should operate on a large scale so that India gets a strategic advantage.

Sitharaman observed: “For India’s aspirations and developmental requirements, we may possibly need 20 banks of the size of State Bank of India (SBI).

“For that, we need to create more and more strength for the existing public sector undertakings, scale them up and make sure that they professionally run themselves.”

Which PSBs could be privatised?

This is a million-dollar question and there is no clear-cut answer. However, analysts have tried to wrap their head around this question and find answers, as is their wont.

Some analysts posit that the government may leave out the five large PSBs – Bank of Baroda (BoB), Punjab National Bank (PNB), Canara Bank, Union Bank of India (UBI) and Indian Bank – from the privatisation exercise as, post-consolidation, they are currently in the midst of stabilising their operations and have just started to reap the benefit of cost-savings.

Moreover, going by the FM’s statement that India may need 20 banks of the size of SBI, the aforementioned banks are likely to remain in the public sector. Maybe, a 5-10 per cent disinvestment of government stake could happen in these PSBs a year or two down the line.

Hence, the attention turns to the six PSBs – Bank of India (BoI), Bank of Maharashtra (BoM), Central Bank of India (CBoI), Indian Overseas Bank (IOB), Punjab & Sind Bank, and UCO Bank – which were not part of the mega-consolidation exercise that happened last year. Since BoI is a fairly large PSB with an international presence (global business mix of ₹10,26,866 crore as of December-end 2020), the government may not be keen on privatising it.

UCO Bank, too, is unlikely to be privatised as two Kolkata-headquartered PSBs have already been amalgamated (United Bank of India with PNB and Allahabad Bank with Indian Bank). So, the Centre may want to retain at least one PSB with its headquarters in East.

Since the government infused ₹5,500 crore in Punjab & Sind Bank only two months back, it may hold back on its privatisation for a year or two. So, the shortlist of PSBs that could be eligible for privatisation gets whittled down to three – BoM, CBoI and IOB. CBoI and IOB are still under the RBI’s prompt corrective action (PCA).

But they could be brought out of PCA as there are visible signs of improvement in some of the key parameters such as profitability and asset quality (in net NPA terms as they have stepped up provisioning) in the last 3-4 quarters.

BoM stands out as it has posted net profit for eight quarters on the trot after the massive quarterly loss of ₹4,856 crore in December 2018. The Pune-headquartered PSB’s asset quality has shown marked improvement and it has a good RAM (retail, agriculture, MSME) to corporate loan mix of 61: 39.

In 2018, Uday Kotak, Executive Vice-Chairman and MD, Kotak Mahindra Bank, observed that private banks’ market share will go up significantly and be on a par with that of PSBs in the next five years. The top banker’s comment came in the backdrop of PSBs then reeling under bad loans and provisioning constraining their ability to lend.

So, will Kotak’s market share prediction come true? Only time will tell whether the government has taken the right decision.

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