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Home / Opinion / Views /  IDBI privatisation is a political test for the government

Six years ago, at the height of the twin balance sheet crisis—over-leveraged corporates and banks weighed down by a mountain of bad loans—the government somehow bought into the idea of experimenting with selling off a bank promoted by the government. Yet, two years after announcing the government's plan in the budget of 2016 to sell its stake in IDBI Bank, Arun Jaitley who was the finance minister then, was forced to concede that India was perhaps not quite ready for privatisation of state-owned banks.

That will be put to test again this fiscal suggest news reports as the government readies for what it claims is a new bidding process for the bank. Collectively, the government and the insurer it controls, LIC, hold over 95 per cent in the bank which the RBI has classified as a private bank. A cabinet approval for strategic divestment and change of management is already in place. Presumably, employee resistance is now much lower than the last time or the government and bank management may possibly be confident of overcoming such a challenge this time. Especially so after the IPO of LIC. The banking industry tailwind marked by improved loan recoveries, credit growth, asset quality and balance sheets, has pushed the IDBI Bank boat too as is reflected in its financials for the quarter ended June. Most metrics including assets, percentage of bad loans, capital and interest margins have moved northwards almost four years after the lender was placed under the RBI's Prompt Corrective Action or PCA framework. It certainly appears to be far more opportune time for a sell-off now than 2016 or 2017 when both banks and the government were struggling to recapitalise with huge provisioning demands made on them after the RBI carried out a review then.

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There is a battle of perception also which the bank and the government will have to counter when the sell-off process kicks off. And that is the evolution of what was India’s top financial institutions along with ICICI promoted over six decades ago. In their glory days during the 80s and 90s, these two institutions were the primary financiers of many Indian corporates and business houses across sectors. But with government support in the form of concessional assistance being pulled off after economic liberalisation in the 90s and a subsequent slowdown hurting them, ICICI swiftly pivoted to the new universal banking model. It reverse-merged the old development financial institution into ICICI Bank for which it had obtained a banking licence in the first round of banking licences in 1994. In contrast, the IDBI leadership went the other way, though it too had a banking licence, dealing a blow to the professed aim of building a commercial banking ethos. The result: a middling bank.

The course correction by ICICI helped it emerge among the top three in the industry despite occasional blips. What is instructive from this is not just the leadership qualities of the two institutions over time but the character of ownership. With a dominant government holding, IDBI had to constantly look over its shoulders and seek the approval of bureaucrats and face the pressure of “directed lending “. ICICI was helped, of course, by the fact that it was treated always as a private lender considering that its major shareholders were more of government-backed financial institutions besides the World Bank.

The broader point in this is that as a dominant shareholder in IDBI, over time the government has been more of a value destroyer like in many other units it has either promoted or runs. The encouraging part now is the recognition finally that reform of these institutions is better left to private hands, freeing up capital and resources for social sectors. The sell-off of Air India reflected that. What should also help the government not drag its feet is the timing. The markets have been relatively buoyant and there appears to be investor interest. The key, however, to ensure the success of the first attempt at privatising a bank with substantial government holding is to expend political capital.

Over six decades, successive governments have baulked when it came to the final push. This will be as much of a political as well as a financial reform test for the Modi government.

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