India's bank privatisation may face hurdles amid Covid-19: Fitch

Political resistance; stress from pandemic may drag

Global rating agency Fitch today said the Indian government's bold move to privatise public sector banks (PSBs) faces risks from political opposition and structural challenges, including heightened balance-sheet stress due to Covid-19.

The pandemic is likely to keep bank performance subdued for the next two to three years. Lack of political support in favour of legislative changes to the Act, which are required in order to go through with the sale, could be a significant hurdle for the government.

There could also be more resistance from the trade unions this time around, who will be against the safety-net withdrawal of state ownership. Success of the plan would also require sufficient interest from investor(s) willing to acquire large stake(s) in state-owned banks and run them, Fitch said in statement.

The privatisation plan was announced in the Union budget for 2021-22 as is part of the government's broader divestment goals for FY22. It includes privatisation of several other non-financial state-owned entities and listing of the wholly-owned Life Insurance Corporation of India (LIC).

The current privatisation plan is as an extension of the government's broader agenda to reform the Indian banking sector and reduce the number of state-owned banks further. The number of PSBs came down from 27 in 2017 to 12 in 2020 after three successive rounds of consolidation, it added.

State banks in general have long been plagued with muted investor appetite due to structurally weak governance frameworks which have resulted in persistently weak performance, reflected in significant asset-quality problems.

Fitch said the Covid-19 pandemic has further dampened business and consumer confidence. Its the impact on reported impaired loans will manifest potentially over an extended timeframe, considering the various forbearance and relief measures by the authorities.

State banks have played a more active role in extending these measures (given their quasi-policy mandate) than the private banks. This will make it more difficult to reasonably assess stress for the state banks, thus adding to the risk of weak earnings performance for a protracted period, Fitch said.