Making bank privatisation exemplary

The proposal of the Union Budget to privatise two public sector banks (PSBs) is a bold and path-breaking one. It truly lives up to the promise made by the government to reduce its ownership and management of businesses and gradually encourage the private sector to take on a larger role in the financial services sector.

The policymakers could have chosen no better time than this financial year as the financial quality of the PSB balance sheets has improved this year compared with the last few years. The non-performing asset (NPA) recovery is much better and the strong message of repayment of dues is conveyed to the borrowers by way of bankruptcy laws and other measures. The effort made by the PSBs during the pandemic have also contributed to improvement in their performance. Some of the PSBs did get recognised for embracing digital banking.

It is critical that this pilot attempt is successful and exemplary. It should pave the way for the government to gradually privatise financial service entities, including insurance, and monetise funds for infrastructure and economic growth. For the desired outcome, the government should examine several factors associated with this initiative. I am sure that the government is mindful of the fact that PSBs are vastly different in regard to parameters, including efficiency and productivity, speed of decision-making and the adaptability to technology, when benchmarked with their private sector peers.

Three vital aspects need to be examined by the government. The first is a good assessment of the possible investors who might be interested in the process. The second important aspect is of what is being offered. And the third one, a transparent process of price discovery and investor identification. Let us examine these three factors in detail.

Existing domestic private sector banks, a few large non-banking financial companies (NBFCs), foreign banks or foreign investors, including private equity and other funds, could possibly be interested. The government process may entail offering the equity to the highest bidder. This will be a mistake. There should be technical as well as price parameters.  It should look at strategic buyers who will develop and enhance its business value. Only those who will commit long-term funds and have the capability to manage banking business should be considered. The investors will examine the potential in the offering based on their own ability to manage the business and realise the potential. If the government is looking for financially sound investors with a good governance record, then it must examine the financial soundness of the bidders and the commitment to introduce a high order of capital when called for.

What is being offered is the second aspect. It is important that the government offers the two proposed banks, which have stable and sound financial performance, proper demographic profile of the employees and their willingness to undergo a substantial change to acquire new skills to suit the fresh corporate objectives of the new promoter. The geographies in which the two banks have their branch network, and the quality of its infrastructure will also contribute to the decision. I am certain that the government is mindful of the reality that troubled banks with legacy issues of below average performance will not attract investors. The government should seriously examine the business value of the bank’s core banking business and evaluate whether the subsidiaries, if any in the businesses of insurance or housing finance, should be bundled with the bank equity or demerged and offered separately. The sum of parts may sometimes exceed the whole.

The banks which are considered for privatisation should meet at least three parameters — they ought to have a good potential depending upon the tangible and intangible assets mentioned above. They should set a shining example for the government to continue offering more PSBs for privatisation. In this regard, the proposed banks should be corporatised as they will no longer be under the nationalised banking Act. Also, the retirement and pension liability and the liability arising out of capital gains from transfer of a controlling stake should be ascertained. The governance requirement under statutes, including companies Act, the banking regulations Act, and the regulations will certainly enhance both the quality of governance and disclosures.

The third factor requires a well-organised conduct of process associated with the bidding (by whatever name it may be called). Show-stoppers, including legal hurdles posed by stakeholders, should be envisaged. The guidelines associated with any offer of sale, including Central Vigilance Commission, be examined at the outset. Any price discovery involved with sale of equity offered will be influenced by the time the proposed investor will have to comply with the process. To reduce time to conclude the process, it could contemplate vendor due diligence and fair market value assessment prior to bidding. Fortunately, all the PSBs are listed and may not face major difficulty in this regard. With more uncertainties in the process, the proposed buyers will reduce or discount the fair price of the banks.

In conclusion, this is a bold initiative. The system and all the stakeholders should work together to make this change happen.

The writer is managing partner, Ashvin Parekh Advisory Services LLP. Views are personal.