Bank privatisation: Can govt ensure no clash of interests?

How do we ring-fence the banking operations from the rest of a corporation’s operations. Pre-emption of banks’ funds by owners could make a financial institution inherently unstable

Employees of various government banks hold a banner as they shout slogans during a protest against the Privatization of Public Sector Banks during a two-day Nationwide strike (Photo by Sonu Mehta/Hindustan Times via Getty Images)
Employees of various government banks hold a banner as they shout slogans during a protest against the Privatization of Public Sector Banks during a two-day Nationwide strike (Photo by Sonu Mehta/Hindustan Times via Getty Images)
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Anjan Roy

Finance minister Nirmala Sitharaman has announced that not all public sector banks will be privatised, but only a select few. If privatisation is good, then all must be privatised; if it is not so, then none should be.

In reality, politicians and policy makers have to strike a kind of balance and that is understandable. So some will be retained in the public sector, that is, in government hands and some will be off-loaded.

Now the question arises, which ones are to be taken up for privatisation and which are to be left untouched. The norms for the selection must be made plain and clear, so that there is public discussion on the issue and views could be expressed. Whatever it is, the norms should be crystal clear and public deliberations are a must before the process begins.

Secondly, there is a conundrum. For privatisation, the private buyers would love to invest in banks which are sound and profit-earning and do not have a bulging portfolio of bad loans. What else to expect. Look at Air India. There would be buyers for the assets of the corporation, sans its huge debt liabilities. Air India can have bright prospects, given the traffic slots it has throughout world’s leading airports. It is the landing rights and routes that are the most valuable assets and determine the future prospects. But then, it is crippled financially and the liabilities are daunting.

Similarly, the coveted banks for the private investors would be the ones which have a slender bad debt portfolio and has a commensurately lower staff strength.

But these stronger banks would be the ones which the government should keep on holding. There is a tendency to consider all public sector units, more so the profitable and sound ones, as family jewels. Talk of selling these and politically the government of the day would be slammed for selling the so-called family jewels.


The finance minister has said that the banks need more capital and the best way to mobilise fresh capital for them would be through share sales in the market. The government is no longer comfortable with the idea of continuing to place more and more funds with the public sector banks’ capital base.

In the current context, when the government has to undertake large scale welfare spending, the finances are already strained. The fiscal deficit is likely to be double the estimates. Even then, it is not enough, as many are saying. Given the depth of contraction of the Indian economy and the severe dent to the economy from the pandemic, critics are saying more direct government spending is needed to shore up the economy.

In fact, the government stimulus packages have been so crafted that the actual spending support comes from banks rather than directly from the Centre’s kitty. They must be already creaking under the burden of previous strained loans, now they are expected to give more funds. These conflicting demands could be met only if the banks are able to sources funds from elsewhere and are able to raise their own capital base.

Placing shares in the market could be best option. These would mean drop in government holding in their capital. There are several options for banks to mobilise additional capital. This can be through the IPO route, when shareholding could be widely spread. But thereafter, the management structure of the privatised banks would have to be re-organised. Shareholding is really widely spread, there could be board managed banks. This will be a novelty and so far untried.

If however the banks are allowed to have block shareholders, which might be better and far higher valuation for the stock, the banks pass on to the strategic investors. Who could then be the strategic investors? Could these be large corporate houses which alone can mobilize adequate funds to make such purchases? But thereafter, how do we ring-fence the banking operations from the rest of a corporation’s operations. Would it be possible to foreclose the possibility of such taken over banks from lending too much of their funds to their shareholder’s operations?

These are valid concerns. Pre-emption of banks’ funds by owners could make a financial institution inherently unstable. Any turn in the fortunes of the owner’s other businesses could upset the banks viabilities and confidence of the depositors. In the worst case, it can cause on run on the bank.

Now a bank failure is far worse than the fall of a industrial corporation or even a trading outfit. A bank’s fall generates reverberations throughout the financial system. We have seen something of the kind in the collapse of the non-banking financial company, IL&FS. When a bank’s depositors are hurt, it ripples through the financial system. This is something which should be avoided at all costs.

Banks in the public sector generate an expectation -- that the government is behind it and that should preclude any run on the bank. The period from bank nationalisation has at least seen one thing— no major public sector bank has seen a run on it and its ultimate collapse. Depositors have not lost their savings in the PSB.

The scenario is fast changing. We have already private sector banks. There have been run on banks -- albeit smaller -- in co-operative sector and private ones. Now if large public sector banks are allowed to be in private hands, sooner or later, there would be cases of bank failures altogether which can shake the entire financial system.

To begin with, government and policy-makers must act with caution, rather than in haste, only to repent at leisure.

Elaborate safety measures should be put in place. These should be discussed threadbare. Depositor protection must be introduced, because that could affect the overall savings propensity. Beaten by bad experience, savers might move to alienate platforms from banks. In our country, at least for the small savers, this might become a preference for gold purchase which can be a macro-economic suicidal move.

Tampering with the financial system is fraught with huge risks and systemic liquidation. Be careful.

(IPA Service)

Views expressed are personal

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