Privatization of state-owned banks, which were making substantial profits, eclipsed the Lok Sabha elections

Favorable conditions for privatization due to reduction in NPA ratio

With the country's public sector banks now making significant profits and non-performing assets also declining significantly over the last two years, the valuations of the country's banks have increased and reports suggest that the government has taken up the issue of privatization again, believing that it is no longer a problem to proceed with the privatization of banks. have been flowing. The report said that the government is considering setting up a special committee to prepare a list of banks that can be privatized and prepare a new strategy for bank privatisation. However, another report mentions that the government will not venture into privatization before the Lok Sabha elections. Earlier also NITI Aayog had handed over the proposal of privatization of two banks to the Department of Disinvestments but no progress has been made so far.

According to the new proposal, the government now seems to want to privatize small and medium banks first rather than big banks. According to the reports received, the shares of the banks will be sold based on their performance. Even earlier, in the budget of 2021, the Finance Minister had proposed the privatization of two government banks, but the amendment to be made in the Banking Act for this purpose has not been presented in the Parliament yet.

A policy paper prepared earlier suggested privatization of all state-owned banks except State Bank of India (SBI). "In principle we are in favor of privatization of all state-owned banks including SBI. But considering India's economic structure and political system, there would be no government that no bank would want to own. Keeping this fact in mind, every government-owned bank except SBI should be privatized," the economists who prepared the policy paper said at the time.

Privatization of banks can provide the biggest relief to the Reserve Bank as it will reduce its responsibility to intervene in case of privatization. Privatization of banks is welcome, but it is not the first time such an idea has come up. Earlier also recommendations have been made by several levels and committees for the privatization of banks in the country. However, it can be said from the recent past that the current government has preferred to merge banks rather than privatize them.

As the government is well aware that it is not easy to proceed with privatization, the government has undertaken an exercise to improve the management and financial health of the banks. The government had announced the privatization of the two banks long ago, but could not go ahead with the legislative changes.

As it has a majority in the Lok Sabha, it may not be politically challenging for the current government to proceed with the privatization of banks, but it is certain that the government will face opposition to the privatization from the employees of the public sector banks. It cannot be denied that the government will consider every aspect in going ahead with privatization amid the state assembly elections in the current year and the Lok Sabha elections in 2024. The Reserve Bank has been very successful in bringing down the NPA ratio in public sector banks which had gone up in recent years.

The gross NPA of the country's banks, which was 6.50 percent at the end of December 2021, fell to 4.50 percent at the end of December 2022. Net NPA ratio was 1.20 percent. At the end of March 2024, gross NPAs are expected to come down to 4 percent. At the end of March 2018, the amount of gross NPAs was as high as 11.50 percent. In the ended financial year 2022-23, there is also a significant increase in the profits of the banks. A low ratio of NPAs can become a strict criterion for privatization of banks. Because any businessman prefers to put his hand in a business that shows a profit rather than take up a business with debt.

There are instances where the government has gone ahead with merging public sector banks instead of mass privatization even after several recommendations. In 2017, there were 27 public sector banks in the country, now they have reduced to 12 due to mergers.

RBI's internal working group in a report prepared earlier had recommended allowing large corporate and industrial groups to run banks, but this recommendation was opposed at many levels because if industrial groups were allowed to run banks, it would create a possibility of conflict of commercial interests. It was argued that corporate houses would use the bank for their own purposes.

In case of privatisation, the investors who buy the bank will be trying to start getting more and more return on their investment and for this they will not hesitate to take measures including major cost cutting, in such a situation the government will have to guarantee the protection of the interests of the bank employees. It will be interesting to see how far the government can go in privatization given the schedule of upcoming elections.