Privatising Public Sector Banks: Putting the Genie back in the Bottle


The long-standing banking reform, Privatisation of public sector banks finally saw the light of day with this year’s budget, recently announced by the Finance Minister. The most notable privatisation of 2 public sector banks namely ‘Bank of Baroda’ and ‘Punjab National Bank’ is particularly noteworthy for investors. 

Privatising the two banks which have been singled out as well as other banks will be a herculean task, especially since clear guidelines have been issued for investing firms:

  • An acquisition will not occur solely on the pretext of saving the bank from ruin but must be in the interest of the investor as well as the customers of the bank.
  • The acquired bank and the acquirer will under no circumstances break pension commitments made to the bank customers. 

The truth about Public sector banks:

  • Most public sector banks are hanging on a thread. Thanks to the government’s uplifting hand, these banks manage to function. 
  • When the hand of the government is withdrawn, the little ground that they stand on will crumble. 
  • Without capital from the government, these banks will fail to meet their capital adequacy norms.
  • They suffer from stressed-assets and non-performing assets, the clear picture of which has remained hidden in the shadows. 
  • Under these conditions, there is no proof to show that a public sector bank on its way to become privatised, is a potentially viable asset. 
  • There is also a very slim chance that the tables on a public sector bank can be turned to make it profitable, once privatised.
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The most notable privatisation of 2 public sector banks namely ‘Bank of Baroda’ and ‘Punjab National Bank’ is particularly noteworthy for investors.

What is enraging bankers regarding the privatisation move- The arguments:

Bankers don’t want to hear a word about taking a perfectly good national bank and going back to making it private. They understand what they stand to lose. Hear their arguments at a recent protest:

  • Public sector banks are viewed as national assets and cannot be tainted by privatisation.
  • Privatisation means aggressive profit chasing and bankers who were basking in the glory of ‘serving the public’ will now be forced to prioritise profits.

The two investment-worthy, privatised banks currently:

Bank of Baroda and Punjab National Bank have directly come into focus. Here’s why these two banks are investment-worthy:

  • The withdrawal of the government’s stake has granted a better structure to both the banks. 
  • Both banks have assimilated premier institutions including Vijaya Bank and OBC which further elevates their positions, respectively.
  • These privatised banks will steadily attract higher and better investors, and this is the right time to make an informed decision.

Conclusion: 

The dilemma here is that this decision will only backtrack from an earlier move by former finance minister Indira Gandhi who nationalised private banks. Now madam Nirmala Seetharaman will re-privatise them and not everyone is able to understand the logic. The truth is that the cat is already out of the bag and some of the concerns as already highlighted raise questions about the undoing of what has already been done.

DU Desk
DU Desk
Stories from DU Desk are the collective efforts of our in-house authors, guest authors and subject matter experts who collate and distill their ideas and thoughts to bring out actionable insights for our readers.

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