Government’s Privatization Drive

Government's Privatization Drive: Reducing the PSBs

While announcing the details of 20 lakh crore stimulus package economic reforms in the light of COVID-19 impact on business and governance, India’s Finance Minister made a huge announcement regarding the privatization drive of the Government of India i.e. PSUs in India will be privatized.

Well! Not all of the PSUs will be privatized.

The government plans to privatize all the PSUs in non-strategic sectors and wishes to keep its stake in strategic sectors by keeping a minimum of 1 to a maximum of 4 PSUs. This mega drive for the privatization of PSUs was made under the Atma Nirbhar Bharat Abhiyan stimulus package.

So why privatization?

What is the need?

In India, privatization is mainly aimed at improving the Foreign Direct Investments (FDI) or investments in the sectors that require technological advancements thereby providing a boost to the economy.

This mega privatization drive is expected to give a boost to the Government’s divestment drive as well.

Now the question arises: Which sectors come under strategic and non-strategic?

There are around 300 PSUs and it’s not clearly defined yet anywhere!

To figure this out, Government has said they will soon frame a new Public Sector Enterprise Policy. This policy is expected to categorize the strategic and non-strategic sectors clearly and the privatization scheme can be worked out accordingly.

There have been speculations about which sectors will form part of strategic or non-strategic categories. But the long on-going confusion for whether the Banking sector is going to be strategic or non-strategic is clear now.

How?

Our Chief Economic Advisor, Mr. Subramanian while addressing the media on Projections on Indian economy by rating agencies Fitch, Moody’s, and Standard & Poor’s (S&P) in mid-July, cleared that banking sector will be a part of the strategic sector.

It’s a relief!

A report on Reuters 7-8 days back, also mentioned a government official stating that the government is planning to reduce the number of Public Sector Banks to 4-5.

As part of an overhaul of the Banking Industry, the government might be thinking to reduce the PSBs. Even many government committees and RBI recommend that India should not have more than 5 state-owned banks.

In the hindsight, it seems clear that the government has been planning to do so since it first started with the merger of all the subsidiaries of SBI with SBI in 2017-18.

The government has been working on the consolidation of banks for long. Later on, in a three-way amalgamation government merged Vijaya Bank and Dena Bank with Bank of Baroda. And last year only, 10 banks were merged leaving only 12 PSBs.

Now, compared to 27 PSBs in 2017 we are left with only 12 banks presently. As already mentioned by our Finance Minister, PSU’s in the strategic sector will be a maximum of 4, and then our Chief Economic Advisor announcing Banking to be part of the Strategic Sector, we may be left with 4-5 PSBs.

But the government has already said there will be no mergers. So, what now?

FM says PSUs will be reduced by either privatizing or will be brought under a holding company. As part of this reduction in the number of PSBs, the government may first try to sell the majority stake of smaller banks like Bank of India, Central Bank of India, UCO Bank, Bank of Maharashtra and Punjab & Sind Bank and then see how it works out by later on completely privatizing them. As per the reports, the government is soon to put up a proposal in the Cabinet on reducing the PSUs and then move ahead.

Is that so simple?

We don’t think so!!

Looking at the current scenario due to COVID-19, the number of stressed assets in the banking industry is sure to rise and who will be willing to take the burden of these increased number of NPAs? Even if the government succeeds to get a party for privatization, will it be getting a good valuation of the company? It is highly unlikely as valuations will be too low for the government to net off any costs incurred, let alone make any profit.

Making the situation worse, 4 PSBs are already under RBI’s Prompt Corrective Action (PCA) framework which puts several restrictions on lending, management compensation, etc. Currently, the on-going situation of COVID-19 has already halted the process of recovery and this has an adverse impact on the financial health of even private sector banks.

So, the current situation is likely to postpone the privatization drive of the Government. 

There have been many views on how the government should go about reducing the number of PSUs. As former RBI governor Raghuram Rajan mentions in his book the government should do three things: Firstly, privatize 1-2 banks fully, secondly reduce shareholding from 1-2 banks to below 51% and thirdly bring some governance reforms. The government then should compare all three scenarios and go along the best one.

Even his predecessor D Subbarao believes when in 1969 we nationalized the banks, reforms were needed, it was necessary that the government take steps to improve the banking sector, but today we are in a different era and government can reduce its stake from the banking sector.

This plan may benefit the banking sector as well. For example, privatization may improve operational efficiency thereby reducing costs, build NextGen banks, technological advancements, enhanced capacity, and also global presence.

We are yet to see how the government plans to go about this drive given the pandemic has already hampered the economy.