PSB Mergers or Privatization, a Good or Bad idea – Government of India had first taken the decision for mergers of Public sector banks followed by Privatization. The government owns more than a 70 percent stake in these banks. The goal of privatization is still not clear but it is believed by the government that Privatizing PSBs is expected to bring in much-needed capital and better operational efficiency in these banks.

Does it really needed ?

1. PSU Banks have acted as vehicles for the roll-out of populist government schemes and the social banking agenda.
2. PSBs have taken banking to rural India where private banks are largely absent.
3. PSBs are required to achieve the Financial Inclusion task for the country.
4. Should India privatize its government-owned banks?
5. No government has shown the political will to implement privatization.

The last time the subject came up for discussion was in 2014 when the RBI-appointed PJ Nayak panel submitted its report reviewing the governance of bank boards in India. Advocating that the government should bring down its stake in PSBs, the panel, under PJ Nayak, former Axis Bank Chairman and CEO and former Country Head, Morgan Stanley India, explained a raft of benefits associated with such a move.

The Nayak Committee suggested that

1. It said given the lower productivity, steep erosion in asset quality and demonstrated un competitiveness of public sector banks, the recapitalization of these banks would impose significant fiscal costs for the government.

2. If the governance of these banks continues as at present, this will impede fiscal consolidation, affect fiscal stability and eventually impinge on the government’s solvency.

3. The government has two options: either to privatise these banks and allow their future solvency to be subject to market competition, including through mergers; or

4. To design a radically new governance structure for these banks, which would better ensure their ability to compete successfully, in order that repeated claims for capital support from the government, unconnected with market returns, are avoided.

Why is Merger of PSBs Good?

1. Governance difficulties in public sector banks

2. Excessive interference of Finance Ministry and RBI,

3. Board constitution, wherein it is difficult to categories any director as independent;

4. Significant and widening compensation differences with private sector banks, leading to the erosion of specialist skills; external vigilance enforcement though the CVC and CBI.

What is Privatization Proposals

According to the panel, if the government stake in these banks were to reduce to less than 50 percent, together with certain other executive measures, all these external constraints would disappear.

But the recommendations, except the creation of a Bank Boards Bureau, which happened in 2016, remained largely on paper.

What is the current status of Privatization?

Finally, the government, in Union Budget 2021, announced its plans to privatize two state-run banks. The names of these two candidates are not known yet. But there is speculation that the Bank of Maharashtra, Bank of India, Central Bank of India and Indian Overseas Bank are being considered for privatization in the first phase.

Also Read – Finally Bankers’ Unions Raised their Voice Against Privatization but Lately

PSU banks have huge asset-quality worries. Can merely privatizing these banks address the problem?

Of the total NPAs in the banking system, over three-fourth are on the books of state-run banks. As of December 2020, PSBs have total Gross NPAs of Rs 5.77 lakh crore and private banks around Rs 1.65 lakh crore. A good part of the NPAs is from large corporate accounts.

A loan becomes an NPA if there is no repayment of interest or principal for 90 days. That apart, banks have written off around Rs 8 lakh crore in the last decade.

A Bad Bank could offer temporary relief to PSBs’ bad loan worries. The government’s plan to set up a bad bank (essentially an asset reconstruction company), which will absorb the existing bad loans of banks, assumes greater significance in the context of privatization.

If the government exhibits strong political will (convincing the influential trade unions) to proceed with the privatization agenda, it will have to first implement the bad bank plan to clean up balance sheets.

If the books are healthy, there could be potential takers among NBFCs and business houses for these banks, else the plan may not take off in the desired way. Buyers will only be interested in taking over healthier, well-run banks rather than taking up the burden of weak, poorly governed banks.

input by moneycontrol