Will 2024 see a renewed push from the Narendra Modi-government on bank privatisation?
To begin with, privatising India’s dozen public sector banks (PSBs) has been a tough task and an unkept promise. In the past, both the United Progressive Alliance (UPA) and the National Democratic Alliance (NDA) administrations have flashed this as their top reform agenda item.
But these promises have been kept on paper. What was probably lacking was sheer political will.
All that has happened so far is a mega-merger of 10 state-run banks into four in 2019-20 and a government-nudged buy of IDBI Bank using India’s largest insurer – Life Insurance Corporation of India – in 2019.
In 2024, the government is preparing to push PSB privatisation. At least, that’s the talk in government circles in New Delhi.
Can this happen?
Well, PSBs have legacy issues. For one, these banks are still dominated by heavily politicised employee trade unions.
Secondly, these banks still function in a sarkari culture, which means the work environment is notably different from that of new-age private banks. After all, a credible buyer must be willing to experiment with deep-rooted legacy issues in these banks.
Additionally, PSB privatisation is politically risky. It involves regional interests (every bank has a local area stronghold) and no government can risk a political backlash when effecting such a move.
However, the political climate is probably turning conducive for big reforms this year. The recent state election victories offer comfort to the ruling party and if the Modi government returns to power in the 2024 general elections with strong numbers, the Centre has a good case to revisit the privatisation plan.
Where are the buyers?
Privatisation involves the sale of a majority or controlling stake in the bank to a prospective buyer. The government wants to kickstart the process afresh and attract suitors. How likely is it that the government will get a buyer this time around?
Actually, the chances are better now. Indian banks have much cleaner balance sheets. The Reserve Bank of India’s Financial Stability Report in December showed that Indian banks are in much better financial health now than they were a few years ago.
The gross non-performing assets ratio of Indian banks has declined to a multi-year low of 3.2 percent in September 2023. The net non-performing assets ratio has eased to 0.8 percent, the RBI said.
According to the Financial Stability Report, the capital-to-risk-weighted assets ratio and the common equity tier 1 ratio of scheduled commercial banks stood at 16.8 percent and 13.7 percent, respectively, in September, indicating comfortable capital levels.
To sum up, thanks to large loan write-offs, PSBs now have a much cleaner book, an issue that bothered investors in the past.
Still, two key hurdles remain.
One, employee unions continue to be a dominant force in PSBs. They strongly oppose privatisation and argue that the move is regressive.
Challenging the trade unions won’t be easy. These outfits are backed by political parties and are powerful factions that can mount considerable resistance using their clout.
Two, even though the level of NPAs has been lowered, the fundamental culture that created unhealthy lending habits remains. These banks continue to operate with a sarkari approach, meaning they still take orders from top bureaucrats on key business decisions.
Changing that frame of mind into a fully professional, board-driven culture will be a challenge, especially when competition from private and foreign banks and a new crop of small banks and fintech companies is intensifying.
Beyond introducing enabling legislation, the government needs to exhibit strong political will and resolve to walk the talk on privatisation. The upcoming Union Budget is expected to offer clues on the government’s thinking on the subject. Let’s wait and watch.