View: Will bank privatisation take the Air India route?

Few will dispute that consumers of the 2020s are different from those in the 1980s. Choice probably is the most important driver of the difference. A car buyer had to choose between an Ambassador and a Premier Padmini. Now it’s more than a hundred models – from the humble Maruti Alto at the entry level to the top-deck Merc.

Similar is the position for investors. It’s not just a few hundred stocks listed on the Indian stock exchanges, but there’s access to Apple Inc and Samsung too. In this era of abundance to put up conditions to sell an asset that’s increasingly turning irrelevant appears rather outlandish.

When the privatization of state-run banks was announced, it was the dawn of a new era, ending the dark episode of the state grabbing private businesses in the name of Socialism. On Thursday, anonymous government sources spelt out how it intended to progress with the privatization of two banks. That raises doubts whether it would progress at all.

It is open to selling stakes in these banks which for the past few years have been struggling with bad loans and lack of growth, but would retain 26 percent that would ensure its dominance, essentially retaining the institutional character.

For anyone, barring the government, the fundamental idea of investment is to earn returns. To improve the financial performance of an enterprise, it needs to change the way it does business. If say

and the Central Bank of India are up for sale and they continue to run the way they are, how would the returns improve?

Doing business alongside the government hasn’t been a pleasant experience for anyone. Just ask Anil Agarwal who has been waiting for a decade and a half for the state to fulfil its part of the bargain to sell the residual stake in Hindustan Zinc Ltd.

Businessmen take risks – be it the economic cycle, interest rate or technology. But to expect them to take violation of contract risk is too much of an ask. The precedent set by the UPA government of Manmohan Singh in reneging on contracts could be a deterrent for any potential bidders to run a bank along with the state.

But there are investors who would take political risk if the asset promises returns because of its growth potential or scarcity.

From the financials stand point, state-run banks are at the bottom of the ladder. They have been lagging behind both in terms of asset quality and growth.

Their bad loans are at 9.54 percent for fiscal 2021 compared with 7.5 percent for the system. While the industry credit rose 5.4 percent state-run banks’ loans rose 3.2 percent when it was 9.9 percent for private peers.

None other than the Reserve Bank of India captures the deterioration of state-run banks.

“With their faster credit growth, private sector banks have increased their share in total credit to 36.6 per cent from 25.7 percent five years ago, at the cost of public sector banks whose share declined from 69.0 per cent to 58.1 percent over the same period,’’ says the regulator.

Despite weak financials some assets could lure investors because of scarcity. Where do state-run banks stand on that count?

State-run banks have an enviable infrastructure in the form of branches and trust. But these are rather baggage in the digital economy than strength.

Any investor putting funds into state-run banks has the Herculean task of not only reducing bad loans, but also transforming the culture. Will private money be charitable to fund the continuation of it?

We know the story of Air India privatization that played out for almost half the professional life of many. At least in the case of Air India, the Tatas had an emotional attachment though its economics was unimpressive. Are the Chettiars and Parsis as emotional?


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