Prime Minister Narendra Modi made a strong pitch for privatisation of public sector enterprises (PSUs), asserting that the “government has no business to be in business”. Addressing a webinar on privatisation by the Department of Investment and Public Asset Management, Prime Minister Modi said that several PSUs in the country were facing losses and needed public money to survive. He said, “PSUs should not be kept running just because they have been running, because they have been somebody’s pet project.”
The idea of privatisation or disinvestment is not new. Rather, it has been a matter of heated debate, especially in the banking sector, whether to and to what extent allow the private sector to enter the space. How will the government’s “no business” in business impact India Inc.?
Let the Bidding Begin: Will Large Business Houses Outbid All?
Reserve Bank of India (RBI) allows business houses that don’t have more than a certain fraction of their business in non-financial enterprises to apply for a bank licence. This means that the aim of bringing in managerial capabilities into public sector banks is already fulfilled. Then why not continue the same and encourage more of these houses to apply for a licence?
Why does the government want to completely privatise banking? Now, let us assume that the process of allotting licenses will be completely fair. Somehow large business houses some may say “well-connected” that already have an initial investment capital will hold an ‘undue’ advantage and will be able to push for the license easily. Can RBI play out fair in terms of license allocation? The RBI is no doubt an autonomous and independent body however not to forget government is sovereign. One such past experience was that of Muthoot Finance who has been eying on a bank license for a long time now. The RBI had also recently turned down Muthoot Finance proposal to acquire IDBI Bank’s mutual fund business.
But if big industrial houses and pubic financial services companies, for instance here Muthoot Finance with an operation income of US$1 Billion are not allowed to bid, who will? Let’s have a look at potential bidders: First are the private sector banks whose finances are already under strain. Second are big foreign banks who may play strong in the bidding process and take over stakes as they have been prying to capture the market share for long. Third are NBFCs, majority of which are, again, run by industrial houses (Mahindra Finance, L&T Finance).
The government has always tried to prohibit entry of corporates into banking for years. However, it has now become imperative to open the sector given the mounting NPAs.
Expanding the Set of Bidders: Shareholder Culture?
The government has always tried to prohibit entry of corporates into banking for years. However, it has now become imperative to open up the sector and hand over the keys to private players given the increasing pressure on taxpayers each day due to mounting Non-Performing Assets.
There is an assumption that the government wants corporates to enter the sector but on conditions. It neither wants to encourage already existing business houses to apply for license as mentioned above, nor wants a large corporate house to take over.
With the privatisation move, the government maybe expanding its set of bidders. Selling the stakes to multiple players or to a broader public will help promote a shareholder culture and distribute the wealth more widely. Private financial institutions could bring
in governance and capital while big tech companies can bring in expertise.
A Decision to Push Payment Banks?
RBI’s internal working group (IWG) report released on November 20, 2020 had pitched for large corporate/industrial houses to run public banks. Former RBI governor Raghuram Rajan and former deputy governor Viral Acharya had opposed the move, terming it as a “bombshell”.
Interestingly, they had questioned the timing of the government’s move to allow the private sector into banking. They offered a reason saying, “There is a proposition that comes out of the government’s privatisation move. An industrial house holding a payment bank license wants to transform into a bank, since one of the IWG recommendations was to shorten the time for such transformation from five to three years”.
As highlighted by Prime Minister Narendra Modi the governments aim is to optimally utilise public money. Union Budget 2021 2022 had given a clear roadmap to take India to a high growth trajectory. PM Modi’s speech made it very clear that government’s focus is to monetise and then modernise. The private sector brought modern technology, a change in the management mindset and created more efficient jobs, thereby increasing efficiency of the entire ecosystem.