IDBI Bank sell-off can set the stage for selling public-sector banks

it is perfectly understandable that the government might still want to own a few banks in order to drive its social programmes.
it is perfectly understandable that the government might still want to own a few banks in order to drive its social programmes.


There is no real reason for the government to own and run 12 public-sector banks and IDBI Bank.

Tuhin Kanta Pandey, secretary of the department of investment and public asset management (DIPAM), while speaking to Business Standard, recently said that the Indian government intended to exit IDBI Bank completely, as it was not in the business of commercial banking. He also clarified that no roadmap or timeline had been set for this exit. In an interview to Mint, Pandey talked about the fact that the opportunity cost of a company staying government-owned has never actually been analysed. Both the points made by the DIPAM secretary are very important in the context of the government continuing to be in the business of banking and the costs that come with it.

First, there is the valuation cost. The stock market doesn’t give a valuation to government-owned or public sector banks (PSBs) that’s close to what it gives large private banks. In fact, analysts at Ambit in a recent research note pointed out that in the period of 7 years up to end-March 2021, PSBs traded at a price-to-book multiple which was at a 74% discount to that of large private banks. It has since come down to 61%, given that PSBs have done well over the last one year. Nonetheless, the gap is still huge.

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Take the case of the private Axis Bank and public sector Union Bank of India. As of March 2022, the total assets of Axis Bank stood at 11.75 trillion and that of Union Bank of India were at 11.87 trillion. Both banks are similarly sized. But, at the time of writing this, the market capitalization of Union Bank was 55,703 crore. In comparison, Axis Bank’s market cap was 2.82 trillion. The major reason for this is that the stock market expects Axis Bank to be run more properly as a bank and hence be more profitable than Union Bank.

This is essentially a huge opportunity cost for the government, given that if PSBs had larger market capitalizations, it could gradually keep selling its stake in these banks and increase the non-tax revenue part of its annual budget.

Second, over the years, privatization by stealth has been happening, which basically means that even though the government hasn’t been privatizing PSBs, the banking sector on the whole is getting privatized, as private banks have been gaining market share. As of March 2010, PSBs had more than three-fourths share in the total outstanding loans of banks. Their share has since fallen to 54.5% as of September 2022. The share of private banks, meanwhile, has risen from 17.4% to 37.3%. Private banks have gradually been nibbling away. This is the clear impact of the government’s lack of expertise in the business of commercial lending, where private banks are clearly more nimble-footed.

Third, over the years, the government, as the owner of PSBs, has had to recapitalize them to make up for their accumulation of bad loans, in order to keep them going. Bad loans are largely loans which haven’t been repaid for a period of 90 days or more. Up until October 2017, any money that went into the recapitalization of public sector banks was allocated for in the budget. Hence, money that went into recapitalizing these banks could easily have gone somewhere else.

Since October 2017, the government has been issuing recapitalization bonds to recapitalize PSBs. The total amount of recapitalization bonds issued now stand at 2.8 trillion. These bonds will mature between 2028 and 2036. The money to repay these bonds will have to come from the budgets of those years.

Also, the bad loans of PSBs had limited their financial capacity to lend over the years, helping private banks gain market share.

All considered, then, the points made by Pandey are extremely relevant. There is no real reason for the government to own and run 12 PSBs and IDBI Bank. The latter is technically not a public sector bank, but given that it is owned majorly by the government and Life Insurance Corporation (LIC) of India, which in turn is owned by the government, how can it be anything but a government owned bank?

Given this, the government should look at privatizing some of the country’s smaller PSBs. Enough money and more has been spent in keeping these banks going over the years. If finding outright buyers turns out to be a difficult exercise, it might just make sense to let these banks sell more of their shares on the stock market to raise capital in order to be able to keep expanding (and ensure that LIC doesn’t have to keep bailing out such share sales). This will automatically dilute the government’s ownership stake in PSBs and the government won’t have to spend money (now or in the future) to recapitalize them.

Of course, it is perfectly understandable that the government might still want to own a few banks in order to drive its social programmes. And that can be done by owning 5-6 lenders and not 13, as it currently does. Further, if PSBs are allowed to be more professionally run, their valuations and market capitalizations will automatically improve. This will benefit the government, which can keep selling their shares to boost the budget revenues. This money can then be used to incentivize PSBs and private banks for proper delivery of the government’s social objectives.

In that sense, the successful sale of IDBI Bank will set the stage for what the government does on the public sector banking front in the years to come.

Vivek Kaul is the author of ‘Bad Money’.

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