Center should privatize all public sector banks except State Bank of India

Last Updated on 2 years by sonnysuman

The Center should privatize all public sector banks (PSBs) except the State Bank of India (SBI). This is because private banks have emerged as a reliable alternative to the public sector banks with substantial market share. According to a report by the National Council of Applied Economic Research (NCAER), government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.

Barring SBI, most other PSBs have lagged behind private banks in all key indicators of performance over the past decade. The report, authored by NCAER’s Poonam Gupta and economist Arvind Pangarhia, said they saw an increase in debt and operating costs.

These PSBs have achieved lower returns on assets and equity as compared to their private-sector counterparts.

PSBs have lost ground to private banks in terms of both deposits and loan advances. Since 2014-15, almost the entire growth of the banking sector has been attributed to private banks and SBI. “Public sector banks have continued to perform poorly during this period despite several policy initiatives aimed at enhancing their performance.

These include establishing a Banks Board Bureau to streamline and professionalize recapitalization, hiring, and governance practices; prompt corrective action plans; and consolidation through mergers, which helped reduce their numbers from 27 to 12 in 2016-17,” the report said.

Non-performing assets (NPAs) of PSBs have risen as compared to private banks, even as the government has invested $65.67 billion in PSBs between 2010-11 and 2020-21 to mitigate the bad credit crisis.

Barring SBI, the market valuation of PSBs remains “extremely low” of money deposited in such banks as of May 31, 2022.

“Meanwhile, private banks have come a long way in terms of market valuation. The report said that the continued decline in the relative market value of PSBs indicates a lack of confidence among private investors in their ability to significantly improve the performance of PSBs.

Excluding SBI, PSBs have a market capitalization of around ₹30.78 billion as against a recapitalization of ₹43.04 billion.

The first two banks selected for privatization should have the highest return on assets and equity and the lowest NPAs in the last five years, the report said.

It also said that it would be easier to privatize less state-owned public sector banks. This is because the first two banks selected for privatization should set an example for the success of privatization in the future. Markets should look at prices in select banks to attract two or more buyers.

Even as NITI Aayog suggested the privatization of the Central Bank of India and Indian Overseas Bank, the report suggested the Indian Bank and Bank of Baroda as the two top options for privatization.

Both have been selected on the basis of criteria such as return on assets, return on equity, NPAs, a government stake, and asset base. Between these two, it would be easier to privatize the Bank of Baroda as the government would need only 15 percentage points to reduce its stake from 51 percent.

Suggesting a selling strategy, the authors say that if the Center wants to keep its share close to the 50 percent limit, it will have to reduce its share in the open market to 50 percent on the 15th of each month.

“The commitment to raise the share price in the market will have an immediate effect, and as the government makes good on its commitment, the price will move towards its expected post-privatization level. In this way, the government will have an impact on the shares selected for disinvestment. will be able to reap the benefits of higher post-privatization,” it said.

The second would be to sell to a large strategic buyer or buyer consortium. However, this will create a hindrance in looking for a big buyer. This is because the existing rules require the shareholding of an individual entity to be reduced to 26 percent or less within 15 years of the initial acquisition.

If the government takes this approach and is required to sell 30 percent or more of its stake, it may have to look for a buyers’ association. Or, according to the report, he will have to sell some of the stock already in the market to retail investors.

NCAER also makes the case for corporate ownership in banks with due diligence as there is a “shortage” of potential large-scale investors in banks.

The report said the government should allow foreign investors including foreign banks and domestic investors as well as corporate houses to participate in the auction.

He said, “Corporate ownership or any potential risk associated with foreign banks can be mitigated by allowing a consortium of corporations to bid with a single corporation stake. It is a foreign firm through proper regulation and supervision. Indian Will surround banking operations.”

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