Privatisation of PSBs: why 'big bang' is not feasible

 

Those pushing for aggressive privatisation of public sector banks (PSBs) in India must keep three points in mind.

One, the evidence on the superior performance of private sector banks over PSBs over a long period is not unambiguous- indeed, there was a trend towards convergence in performance until the first decade of the 2000s.

Two, the sale of PSBs is fraught with practical problems given RBI’s norms for private and foreign ownership.

Three, as a recent paper put out by RBI points out, ‘big bang’ privatisation of PSBs is not desirable as it could create a void in financial inclusion.

My article in EPW focuses on points one and two.

Comparisons between PSBs and private banks are distorted by the fact that the comparisons do not eliminate “survivorship bias.” The PSB sample includes more private banks that have failed (25) and have got merged with PSBs than the number of private banks that failed (11) and were merged with other private banks (Ghosh and Kumar 2022).  

Secondly, the divergence in performance between PSBs and private banks happened after the global financial crisis (GFC) of 2007–08 and became glaring only post 2011–12. In 2010, the gross NPAs/gross advances ratio were 2.3% at PSBs and 3% at private banks. By March 2020, the position had changed dramatically: the respective numbers were 11.3% and 4.2%.

The divergence happened because PSBs lent massive to infrastructure (power and telecom) and related sectors, namely, mining, iron and steel, textiles, and aviation. These five sectors accounted for 29% of all advances at PSBs and 14% of advances at private banks. Such lending was not on account of poor underwriting skills at PBS. The Economic Survey of 2016–17 noted,

the vast bulk of the problem has been caused by unexpected changes in the economic environment: timetables, exchange rates, and growth rate assumptions going wrong.

As to the mechanics of privatisation, we need to be clear answers to the question: whom do you sell the PSBs to? You can't sell them to corporate houses, RBI policy does not allow corporate ownership in banking. Foreign banks are either not interested or are not willing to enter the country via the subsidiary route as mandated by RBI. The larger private banks have large enough networks and don't want to be saddled with the legacy issues at PSBs.

That leaves you with FIIs, including private equity. The RBI is willing to allow only a maximum stake of 15 per cent for such entities. They will want a controlling stake, preferably 51 per cent and with zero government presence. That is not a condition that can be easily met.

Then there are the legislative amendments needed to the Bank Nationalisation Act, on which Parliament has to sign off.

So, you see, in the very nature of things, PSB privatisation can't be accomplished in a hurry.