BackPSBs should operate like proper banks if they can’t be privatized
Their valuations would rise and let the government raise more money by selling off stakes in them
PremiumBank unions plan to go on a strike on 15 and 16 March to oppose the planned privatization of public sector banks (PSBs). In the budget, finance minister Nirmala Sitharaman announced plans to privatize two PSBs, apart from IDBI Bank.
The privatization of IDBI Bank is very important if the government wants to get a good valuation while listing Life Insurance Corporation (LIC) of India. Prospective investors won’t like the idea of an insurance company owning a bank, almost one-fourth of whose loans have been defaulted on.
Having said that, the history of capitalism is replete with people protesting whenever the status quo has been disturbed. Given this, the strike plan of the bank unions is hardly surprising.
Take the story of James Hargreaves, an illiterate English cotton weaver, who lived in the 18th century. Hargreaves invented the spinning jenny, one of the first inventions that ultimately led to the industrial revolution.
As Daniel Susskind writes in A World Without Work: Technology, Automation and How We Should Respond: “This was a machine that would allow thread to be spun from cotton far more swiftly than with human hands alone." Hence, it would have led to job losses among individuals who were employed to spin cotton. Given this, Susskind writes: “When word spread about what Hargreaves was up to, his neighbours broke in [and] demolished the machine."
This time is no different. What had happened at the dawn of capitalism is happening now as well. The government’s decision to privatize two PSBs disturbs the status quo of the employees of public-sector banking, who want to continue being government employees.
As is well known, the performance of PSBs over the years hasn’t been worth the money that the government has invested in them. As the Economic Survey of 2019-20 pointed out: “Over ₹4.3 trillion of taxpayer money is invested as government’s equity in PSBs. In 2019, every rupee of taxpayer money invested in PSBs, on average, lost 23 paise. In contrast, every rupee of investor money invested in New Private Banks—banks licensed after India’s 1991 liberalization—on average gained 9.6 paise."
This difference in performance is also reflected in the market capitalization of PSBs. The combined market value of HDFC Bank’s shares is ₹8.56 trillion (as of 18 February), whereas the market capitalization of all PSBs is around ₹6.41 trillion (excluding IDBI Bank, which is now categorized as a private bank). Of course, if we add up the assets of PSBs, they are a lot bigger than HDFC Bank’s.
A bulk of the market capitalization of PSBs can be ascribed to State Bank of India (SBI), which is valued at ₹3.7 trillion. The valuation of the remaining PSBs stands at ₹2.7 trillion. This is significantly lower than even Kotak Mahindra Bank, which is worth ₹3.85 trillion. To take this point a little further, Kotak has a higher market capitalization than even SBI, though the gap has shrunk of late. Asset-wise, Kotak is a puny bank in comparison to SBI.
This difference in valuation comes from the fact that private banks and PSBs do not have a level playing field. The former are regulated by the Reserve Bank of India (RBI), whereas PSBs are regulated both by RBI and the department of financial services under the finance ministry.
As the P.J. Nayak Committee report of May 2014 had pointed out: “For instance, in the period October 2012 to January 2014, the finance ministry issued 82 circulars to public sector banks. Private sector banks are free of dual regulation."
This is primarily because PSBs are used by the government to fulfil its social obligations and pump-prime the economy when it’s not doing well. The stock market discounts these factors while valuing them.
This is something that Indian politicians and policymakers need to realize. As R.C. Bhargava, a former Indian Administrative Service officer and current chairman of Maruti Suzuki, points out in his book Getting Competitive: A Practitioner’s Guide for India, in the context of Japan: “The policies for regulating and promoting industrial growth do not have any social content in them." Hence, PSBs should be run as proper banks irrespective of whether they are privatized or not. If they are not privatized, the government’s stake in these banks needs to come down to 33%, something which would help them raise more capital.
Once investors see PSBs being run as proper banks and not as government organizations trying to fulfil social objectives, their market capitalization will start to go up. Once PSBs are properly valued by the stock market, the government can sell some of its stake in them every year, and use that money to fund its social objectives. It can also use some of that money to incentivize all banks, not just PSBs, to deliver some of its social objectives. At the end of the day, nothing improves service delivery more than some good competition.
On the flip side, it is worth remembering that irrespective of whether the government privatizes PSBs or not, privatization of the banking sector is already on. In March 2010, the share of PSBs in India’s total outstanding loans was 75.1%. In September 2020, it was down to 57.3%.
Vivek Kaul is the author of ‘Bad Money’.
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