Start with smaller banks

Govt must have a clear road map for PSB privatisation

The government has reportedly shortlisted four mid-sized to small public sector banks (PSBs), of which two will be privatised in the coming fiscal year. This is in keeping with Finance Minister Nirmala Sitharaman’s announcement in the Union Budget. The intent to privatise PSBs and a new public sector enterprise (PSE) policy in general mark a clear break from the past and will give a significant push to the overall economic reforms process. It has also been reported that the government is contemplating appointing an independent expert panel to handle overall PSE privatisation. This would again be a step in the right direction, as the government’s track record in disinvestment so far has left a lot to be desired.

It is important to recognise that privatisation at scale would not be easy, particularly in the case of PSBs. In this context, aside from dealing with the political opposition and legal issues, the government will need a clear road map. Many have advocated that the government should privatise the bigger PSBs first to make a greater impact and show its determination to give a big push to privatisation. But that might boomerang because of stiff resistance from trade unions and political parties. Starting with relatively small banks is thus a good idea because it will help test the waters. The government must show some urgency and should start early in the next fiscal year because the process is likely to be time-consuming. Besides, it will have to settle a number of operational issues. For instance, will the government sell its entire stake in the selected PSBs or keep a minority holding and transfer the management to the buyer? This is important because the government holds a large majority — over 90 per cent in some PSBs — but there are restrictions on shareholding in the private sector. The government retaining a minority stake may also prove to be a problem as the fear of interference would discourage potential buyers.

A recent report of an internal working group of the Reserve Bank of India (RBI) had recommended that the cap on promoters’ stake can be raised from 15 per cent to 26 per cent over a period of time. This could help attract potential bidders. The government, in consultation with the RBI, will have to decide the kind of potential buyers it should be considering. The working group had also recommended allowing large corporate and industrial houses as promoters of banks. There are strong views against this idea because it can not only increase risk in the system but also result in excessive concentration of power.

The most important aspect will be how the government intends to deal with the issue of employees. PSBs have a large number of employees and owners in the private sector may not be able to retain all. So a detailed road map on this needs to be drawn up as well. The bottom line is clear: Privatising some of the PSBs is inevitable as the government does not have the required fiscal space for continuous recapitalisation, and past attempts to improve their operations have not worked. In fact, government ownership itself imposes constraints on PSBs and affects their performance. But it is equally true that any successful privatisation would depend on how effectively the government handles some of the operational issues.