Bank Privatisation As An Experiment

Context: The proposed move of the Government of India to privatise Public Sector Banks (PSBs) as an experiment is bound to face certain challenges and concerns.

Concerns and Challenges Associated with Privatisation Drive

• Uncertainty over imparting autonomy to PSBs: transferring shares of PSBs to “independent” professionals (however eminent, as proposed by P J Nayak Committee) seems impossible.
• Differences in public and private sector models: It is difficult for PSBs to match private-sector compensation and their inegalitarian pay structure by reducing the government’s holding below 50%.
  • While one offers high pay, the prospect of rapid promotion and considerable work pressure, the other offers job security, enormous challenges, quality housing and a lower cash component.
• Finding interested buyers: Neither the large private banks (due to culture and legacy issues) nor corporations (due to political issues) nor foreign banks(due to RBI’s stringent norms) would be keen.
• Adverse impact on depositors: due to drop in government shareholding below 50%.
• Dealing with large tracts of PSBs land: (like headquarters, regional offices etc.) Private investors will want to rationalise branches and reduce employee and transfer extra land to SPV for easy valuation.
• Low valuations: Most PSBs are trading way below their book values today.
• Resistance from bank unions: bank unions have already called for a two-day strike. Private investors will want to rationalise branches and reduce employee strength.

Way Forward

• Privatise the whole banks: Better to go the whole hog and privatise the ones not needed.
  • Start with, say 2 banks; carefully watch their governance and performance over at least three or four years before we think of privatising any more PSBs.
  • Need investors who will actively monitor the privatised bank; like Private equity firms - The RBI’s Internal Working Group to review bank ownership had recommended that non-promoter shareholding be enhanced to 15%
• Persuade bank unions: assure unions that PSBs’ share will not fall below, say, 50% in the next three years, and employee interests in privatised banks will be safeguarded.
• Re-invest privatisation proceeds: in the remaining PSBs to improve their valuations, boost lending and produce positive outcomes about privatisation drive.
• Build a Special Purpose Vehicle (SPV): As in the case of Air India, it may make sense to move some of the land and building to a Special Purpose Vehicle.
• Set up a PSBs and private banks sponsored Asset Reconstruction Company (ARC): with the aim of getting some bad loans off the books of banks that are to be privatised.