More than Rs 1,00,000 cr is waiting to enter Narendra Modi govt’s wallet if it bites PSB privatisation bullet; timing is never better

The Narendra Modi government 2.0, which will present its first full budget on 5 July, is likely to provide Rs 30,000 crore to help the state-owned banks meet their minimum regulatory capital requirement. That appears to be a conservative estimate. The capital requirement will go up further if one takes into account the additional capital needs of banks under prompt corrective action (PCA) and in the event of mergers like the just concluded three-way merger of BoB, Dena and Vijaya Bank, where the government had to spend an additional Rs 5,000 crore to enhance the capital base of the merged entity.

To put things in perspective, the government has been infusing large sums over the years to keep these banks afloat. Last fiscal year, the government made record capital infusion of Rs 1,06,000 crore in the public sector banks. It was enhanced from the earlier provision of Rs 65,000 crore in December 2018. This helped some of the state-run banks to come out of the PCA. In the fiscal year 2017-18, it infused Rs 97,577 crore in state-run banks.

 More than Rs 1,00,000 cr is waiting to enter Narendra Modi govt’s wallet if it bites PSB privatisation bullet; timing is never better

Representational image. Reuters

Is this kind of massive capital infusion using taxpayers’ money justified in state-run banks pitted against their smarter rivals in the private sector? When it comes to asset quality and profitability, most PSBs continue to lag behind well-run private banks, one reason is the lack of aggression in business operations, intervention of government in these entities for the forced role of social sector schemes and lapses in following golden rules of high-value lending that led to the piling up of bad loans in the post-crisis period.

But, the government, fighting a fiscal conundrum (it has already slipped) has a golden opportunity now to get out of this annual burden—if it chooses to bite the privatisation bullet.

To get a perspective, consider this: Even if the Modi government decides to keep 51 percent and let go of the remaining stake, it will fetch the government close to a lakh crore in revenue. This is, of course, the base case scenario because the true sense of privatisation happens only if the government decides to cut stake much below the 51 percent.

Bank Market-cap in Rs cr Govt stake (%) Stake beyond 51% Stake value in Rs cr
SBI 307185 57.1 6.1 18830
Bank of India 28804 87.1 36.1 10384
PNB 36464 75.4 24.4 8901
Allahabad Bank 15575 92.0 41.0 6387
Corporation Bank 14446 93.5 42.5 6140
Bank of Baroda 41445 65.4 14.4 5956
UCO Bank 13362 93.3 42.3 5651
Oriental Bank 12716 87.6 36.6 4651
IOB 10805 92.5 41.5 4486
Indian Bank 13149 81.5 30.5 4009
Canara Bank 20225 70.6 19.6 3968
Central Bank 9655 91.2 40.2 3881
Bank of Maha 9552 87.7 36.7 3509
United Bank 7636 96.8 45.8 3500
Union Bank 13126 74.3 23.3 3054
Andhra Bank 7208 87.8 36.8 2653
Syndicate Bank 9313 78.5 27.5 2559
Punjab & Sind Bank 1497 85.6 34.6 517
Total 572161 99038
Note: Market capitalisation as on 12 June 2019

In a bank like United Bank of India (UBI) which has a habit of running into a financial mess, the government has a holding of 96.83 percent. Even if the government retains the 51 percent stake and sells remaining, in the current market price, it will fetch, Rs 3500 crore. Similarly, in Bank of India (BoI), where the government has 87.05 percent, a stake sale will fetch Rs 10,384 crore on 36.05 percent stake sale.

Once the government privatises the PSBs, it has two major immediate gains as stated above. One, the burden of annual capital infusion ritual disappears instantly. Second, these banks will then be forced to compete in the market and fend for themselves. In the long run, this will enhance their efficiency and change these entities into stronger institutions.

As this writer argued in a previous article, Modi now has a bigger opportunity to privatise PSBs as 1) these banks have much cleaner books now post the asset quality review and the other one major resistance factor in the state-run banks against the privatisation of government banks — the powerful trade unions — are relatively weaker now post the decimation of the Opposition in the 2019 general polls. If the government takes a step forward and assures these trade unions of the potential job losses, there are better chances for a consensus.

Privatisation of government banks doesn’t mean the government will have to give away control over these institutions for the roll-out of social sector programmes for which these entities have played a crucial role during the Jan Dhan launch.

Also, the government can keep the majority stake in 3-4 large PSBs such as SBI, PNB, BoB and Canara Bank letting go of the rest. The weaker and inefficient ones can be sold off.

More than Rs 1 lakh crore is waiting to enter Modi govt’s wallet if it bites the PSB privatisation bullet; the question is will it do it finally?

(Kishor Kadam contributed data to this story)

Updated Date: Jun 17, 2019 16:14:53 IST