How Privatization Priorities Of The Government Can Boost FinTech Industry

Naina Sood — Tue, 02 Mar 2021 08:35:04 +0000

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).

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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.

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

DU Desk — Fri, 26 Feb 2021 12:30:47 +0000

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.

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