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Uneven road

Privatisation of banks will strengthen Government’s financial position but may cost credibility and employment

Uneven road
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This will be the first time in the banking history of India, when the Government will sell its stake or privatize four state-owned banks. As of March 2017, there were 27 state-run banks in the country, whose number reduced to 12 in April 2020. Now, the Government wants to sell its stake in four public sector banks viz. Bank of India, Bank of Maharashtra, Central Bank of India and Indian Overseas Bank. Of these, Bank of India is the big bank, while the other three are small. There are 50,000 employees in Bank of India, 33,000 in Central Bank of India, 26,000 in Indian Overseas Bank and 13,000 in Bank of Maharashtra. Thus, these banks employ 1,22,000 employees and have a total of 15,732 branches.

At the core of the privatization of state-run banks is a huge reduction in the Government's revenue during the Corona period. The Government wants to meet this shortfall through disinvestment, as the sources of revenue have dried up during the Corona period. However, it is almost impossible for the Government to achieve the disinvestment target in FY 2021. Therefore, the target of disinvestment has been reduced to Rs 32,000 crore in FY 2021. For FY 2022, the Government has set a target of Rs 1.75 lakh crore for revenue from disinvestment, out of which one lakh crore is proposed to be raised by selling government's stake in public sector banks and other financial institutions. The disinvestment process was initiated in 1996. In that year, the Government had disinvested in 31 public sector undertakings and earned Rs 3,038 crore as non-tax revenue.

The Government holds 95.8 per cent stake in Indian Overseas Bank, 92.5 per cent in Bank of Maharashtra, 92.4 per cent in Central Bank of India and 89.1 per cent in Bank of India. If the Government reduces its stake to 51 per cent in Bank of Maharashtra and Central Bank of India, it will get Rs 6,400 crore. Similarly, if the Government sells its entire stake in Bank of India and Indian Overseas Bank, it will get around Rs 28,600 crore. Indian Overseas Bank holds the highest equity capital, while Bank of India shares have a higher market-value than other state-owned banks. If the Government keeps the management of both banks in its hands and sells its stake at 51 per cent to the current price, it will get around Rs 12,800 crore. It is believed that the Government will bring its stake in public sector banks to 51 per cent and after that it will bring it down to below 50 per cent. This will be done, so that corporates can become part of the privatization scheme of these four banks.

The Government will get its capital back by selling its stake in banks. Though, the present value of this capital will depend on the market situation and the inherent strength of the bank, such as the number of branches and customers, and the level of business and NPAs. After privatising the banks, the Government will not need to infuse any more capital into these banks, which will help the Government to strengthen its financial position. In addition, government departments like the Ministry of Finance, Central Vigilance Commission etc. will not need to monitor and supervise these institutions, which will save both human resources and money.

Some people are speculating that the new acquirer will be able to run the banks efficiently. The Government will also get better value from these banks. Private shareholders will also be benefited. However, the value of the shares will be based on the performance of the banks. Some people in the market are also of the opinion that even if the Government wants to disinvest in sell the public sector banks, it will not be easy for it to sell them. For example, the Government has been trying to disinvest in Air India for a long time, but it has not been successful so far because the Government is not getting its proper price.

Bank of Maharashtra's gross non-performing assets (NPAs) stood at Rs 8,072.43 crore as on December 31, 2020 as against Rs 9,105.44 crore on September 30, 2020. At the same time, it was Rs 15,745.54 crore as on December 31, 2019. The gross NPA of Bank of India in December 2020 stood at Rs 5,499.70 crore, as against Rs 5,623.17 crore in September 2020. The gross NPA of Indian Overseas Bank decreased to Rs 16,753.48 crore in December 2020 from Rs 17,659.63 crore in September 2020. Similarly, the gross NPAs of the Central Bank of India stood at Rs 29,486.07 crore in December 2020 as against Rs 30,785.43 crore in September 2020. The quarterly performance of these banks makes it clear that these four banks are not being privatized due to their poor performance. The performance of these banks is getting better than before.

The privatization of the four public sector banks will increase the chances of dismissal of the employees who are working there. Therefore, the privatization of these banks can have a negative impact on the welfare image of the Government. Due to an uncertain future, employees will not be able to discharge their duties efficiently, which will affect the performance of these banks.

The service fee of these banks will increase and they will avoid serving in rural areas. They will also not take interest in implementing Government-sponsored schemes. Further, these banks will don't do works related to various non-remuneration services like pension disbursement, Atal Pension Yojana and Sukanya Samriddhi Yojana. These banks can provide more non-banking services like mutual funds, insurance etc. to increase their revenue.

The level of credibility in the minds of customers towards these banks may be diminished after privatization, as Yes Bank and Punjab and Maharashtra Co-operative Bank (PMC) had recently been in financial trouble. Since nationalisation, public sector banks have contributed significantly in formulating government schemes. Therefore, privatization of four banks will increase the pressure on the employees of other remaining public sector banks to implement government-sponsored schemes. Also, the remaining public sector banks' employees will work under pressure for the fear of losing their jobs, which will affect their performances.

Still, a section of the country considers privatization as the panacea for every problem, but this is not completely true. Many private banks have sunk. The latest case is of Yes Bank and PMC. The performance of public and private sector banks during the Corona period is not hidden from anyone. Disinvestment of public sector banks may fetch crores, but the Government will also need to assess how much it will be benefited from this. It is not necessarily the advantage in cash. The question is also about generation of employment and increasing work pressure on the employees of remaining public sector banks.

The writer is the Chief Manager in the Department of Economic Research at the Corporate Centre of State Bank of India, Mumbai. Views expressed are personal

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