Narendra Modi 2.0: Why landslide mandate, right conditions make it perfect time for govt to kick-start weak PSBs’ sell-off

“The government has no business to be in business,” said Narendra Modi soon after his landslide victory in the 2014 Lok Sabha elections. Investors and analysts took these words as a big clue that the new government intends to exit public sector undertakings (PSUs) across.

But, blame it on the political compulsions, the deeply messed up banking system, mainly state-run banks, or unfavourable market conditions, no significant headway was made on this promise.

That, of course, with some exceptions when the government’s favourite milch cow, Life Insurance Corporation of India (LIC) was deployed to take over a critically ill IDBI Bank. Also, some of the zombie banks among the public sector banks (PSBs) were merged with a bigger bank.

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As Modi is set to begin his second term in office with an even bigger majority and less political resistance from a decimated Opposition, he has a better opportunity to do what he promised five years ago.

File image of Prime Minister Narendra Modi. PTI

At least in the public sector banking industry, there are quite a number of good reasons why Modi can think of selling each PSB to private parties which will help it get rid of the burden of capitalising these banks every year and ensure only the fittest survive.

Reason one: A major part of the non-performing asset (NPA) clean-up process initiated by the Reserve Bank of India (RBI) under former governor Raghuram Rajan is over. The banks have much cleaner balance sheets now except in agriculture/MSME portfolios. The uncertainty on the hidden NPAs was a big reason why investors hesitated to look at these banks. Nearly Rs 9 lakh crore additional NPAs have been dug out as part of this exercise. That is from around Rs 2 lakh crores in the United Progressive Alliance (UPA) era to around Rs 11 lakh crore now. This chunk of bad loans, which bankers happily evergreened in understanding with large borrowers, had to come out at some point.

Two, of the 18 PSBs present, 16 have government holding over 70 percent as of end-March, 2019. In at least 12 of them, the government has over 80 percent holding and in six of them, it has over 90 percent stakeholding. These are Andhra Bank, Central Bank, Corporation Bank, Indian Overseas Bank, Uco Bank and United Bank. There is no point for the government to hold such a majority stake in the banks. It isn’t in that business.

Three, due to the high NPA levels in many PSBs, which is a logical consequence of the bad loan clean-up process would mean, the government will now have to begin sending a substantially higher chunk of money to fill their widening funding gaps. The present schedule of capital infusion won’t suffice to go ahead. The question is, will the government has enough means to satisfy the capital hunger of post-clean-up period PSBs, certainly not. A better option is to let them go to private hands.

To give a perspective, of the 18 PSBs now, at least ten have gross NPAs above 15 percent of their total advances. This means Rs 15 out of every Rs 100 they have lent have gone bad. Out of this one bank—Uco Bank —has GNPA at 25 percent and Indian Overseas Bank has 21.97 percent GNPAs. Under the current norms, banks need to set aside money in the form of provisions to cover such problematic loans.

Four, 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.

Five, 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.

Six, the ongoing amalgamation drive among PSBs — the process of merging weaker ones with stronger ones— wouldn’t make much sense since the problem is only going from one hand to the other. The fundamental inefficiencies that led to the current situation of the PSBs remain. Only outright privatisation will help.

Seven, the market conditions are now favourable compared with earlier years. There is a renewed enthusiasm post the return of the Modi government and hopefully there will be better investor response for the PSB privatisation proposals. During Modi's first term, he did the mistake of not using the market euphoria to kick start the disinvestment. When the government was finally ready for that, it was too late.

Modi has both the political will and the right conditions now to begin the process. Without this, the gains of painful NPA clean-up process will prove to be of no help — PSBs will eventually walk into another round of NPA mess.

(Data support by Kishor Kadam)