Privatisation off the table for banks

With stalled reforms and limitations of coalition politics, PSBs remain shackled by govt control

In her Budget speech for the financial year 2021-2022, Union Finance Minister Nirmala Sitharaman announced the Modi government’s policy on disinvestment of central public sector undertakings (CPSUs). She mentioned plans to privatise two public sector banks (PSBs) and one insurance company.

A PSB is a bank where the central government holds a majority share of over 50%. Disinvestment refers to the sale of these shares to private investors. When such a sale reduces the government’s shareholding in a PSB below 50% and ownership and management control are transferred to a private entity, it is termed privatisation.

Has there been any follow-up action to the finance minister’s announcement?

Apart from offloading 3.5% of its shareholding in the Life Insurance Corporation (LIC), the government is selling its stake in IDBI Bank. The process of selling the latter, which started in May 2021, is expected to get consummated during the current financial year. However, this cannot be termed privatisation, as IDBI Bank was already operating as a private lender, with the Centre acting as a passive shareholder consequent to capital infusions to manage the bank’s bad debt losses.

What about the others?

Any further action seems unlikely. If privatisation were still a priority, the government would have set a target for ‘receipts from disinvestment’ in its 2024-2025 Budget. But it hasn’t. Instead, the finance minister has allocated Rs 50,000 crore under the heading “miscellaneous capital receipts.”

Second, the Modi administration is reviewing its strategy to shift its focus from selling CPSUs to what it describes as ‘prudent public wealth management’ (PWM), supporting not-for-profit enterprises, and ensuring the strong presence of State-run firms in strategic sectors.

Banking, insurance, and financial services (BIFS) were one of the four strategic sectors mentioned by Nirmala Sitharaman in her budget speech for 2021-22. BIFS also qualifies for not-for-profit enterprise categorisation, especially when it comes to PSBs and State insurers, which are expected to contribute to realising social objectives such as reaching services to remote and inaccessible areas or vulnerable/deprived sections of society, etc.

Third, unlike the previous two terms when the Bharatiya Janata Party had an absolute majority in the Lok Sabha, in the third term, it depends on the support from its major allies, namely the Telugu Desam Party and the Janata Dal (United), for implementing far-reaching decisions such as privatisation.

Moreover, in the current political environment, even minor moves such as ‘lateral entry’ of specialists from the private sector—the sole intent behind this step was to deliver more effective governance in sync with contemporary challenges—are opposed by the Opposition forcing the government to retreat; it wouldn’t be inclined to make a big move such as privatisation of PSBs.

Fundamentally, most of the ills associated with the functioning of CPSUs, including PSBs, have a lot to do with their continued majority ownership (shareholding of more than 50%) and control by the government. This brings them under a plethora of controls and monitoring/surveillance/vigilance and has the effect of shackling its management.

Armed with this control, the political establishment makes all board-level appointments, viz., CMD/MD, and deputes bureaucrats on a bank’s board. In other words, the entire board is geared to listen to his master’s voice (read the political bosses) when it comes to taking policy decisions or even in its day-to-day running. In the past, meddling in the affairs of PSBs took the form of what came to be known as the cult of ‘crony capitalism’.

The businessmen patronised by the ruling class managed loans on considerations other than merit and got them ever-greened (taking a new loan to payback the earlier one). Neither the banks insisted on repayment, nor the defaulters had any sense of fear, as those who were expected to take action chose not to.

In the past, the political brass also rode piggyback on PSBs for absorbing losses/liabilities created by populist policies such as supplying power to farmers and households at subsidised rates (or even free in some states). Be it a spate of bailouts given to power distribution companies (discoms) or loan waivers given to farmers, etc., these inflicted heavy losses on PSBs.

Disinvesting PSBs and State insurers should be seen in the context of the dire need for reducing bureaucratic interference and granting autonomy to their management for speedy decisions and improved functioning. The 2021-2022 budget announcement was a good step forward, though belated. To put it on the backburner doesn’t bode well for banks’ health. 

(The writer is a policy analyst)