The weak financial metrics of lenders like Central Bank of India and Indian Overseas Bank (IOB) may throw unexpected hurdles to the government’s plan to privatise at least two of the state-run banks in the initial phase, according to banking analysts and experts.
On June 8, shares of Central Bank and IOB soared 7-14 percent on reports that the Niti Aayog has recommended the names of the two banks to the government for privatisation. Both the lenders are currently under the Prompt Corrective Action (PCA) imposed by the Reserve Bank of India (RBI).
PCA involves the imposition of certain business restrictions on banks with weak financial metrics by the RBI. The nature and degree of curbs are threshold-based and depend on the financial profile of each individual bank.
Investor interest might be especially muted for banks which are currently restricted from pursuing loan growth to higher-yielding borrowers and branch expansion under the RBI’s PCA, Saswata Guha, senior director, banks at Fitch India Services, said in a report dated June 7.
“… this will be challenging, since banks in this category – despite their wide reach and substantial franchises – have generally compromised financials, with impaired-loan ratios ranging between 9.8 percent -16.3 percent and common equity Tier I ratios between 8.8 percent -10.3 percent in 9MFY21,” Guha said.
Central Bank posted a net loss of Rs 888 crore for FY21, which was narrower than the loss of Rs 1,121 crore in FY20. IOB, which is yet to declare its results for Q4 of FY21, posted a profit of Rs 482 crore for the nine months to December 2020, as against a loss of Rs 8,527 crore for FY20. Both banks have gross non-performing asset (NPA) ratios in double digits — 16.55 percent for Central Bank and 12.19 percent for IOB.
Despite the PCA curbs, though, both lenders have managed to grow their loan books. Central Bank’s gross advances rose nearly three percent between March 31, 2020 and March 31, 2021 to Rs 1.77 lakh crore. IOB’s advances stood at Rs 1.37 lakh crore as on December 31, 2020, up two percent year-on-year.
Being state-owned banks, they continued to enjoy the trust of depositors despite being under PCA. Central Bank’s deposits grew over five percent y-o-y to Rs 3.3 lakh crore as on March 31, 2021 and IOB’s deposits also increased by a similar degree to Rs 2.34 lakh crore as on December 31, 2020.
Legacy problems persist
Public sector banks also have peculiar problems, such as that of a high pension burden, which could deter investors. “Foreign investors will be wary after the experience of Vodafone and Cairn. No domestic investor will want to buy a public sector bank because the pension liabilities will be too huge,” said Devidas Tuljapurkar, convenor of the United Forum of Bank Unions in Maharashtra. There are now more retired employees in the banking sector than current employees, Tuljapurkar added.
Also, there is lack of clarity on RBI regulations on ownership that might determine the eligibility criteria for owners of these banks, said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services (APAS).
“On the subject of privatisation, there is a need for more clarity. We have not heard from the government or the RBI on the matter since the Budget announcement. There will be clarity needed on who will be deemed eligible to buy these banks,” Parekh said.
It will have to be someone who is willing to invest a good Rs 20,000-40,000 crore to turn these banks around, Parekh added.
Parekh also stressed on the need for an enabling environment in terms of governance and technological infrastructure at these banks. “Once there is more information on these areas, we can move forward from there,” he said.
The culture of governance at public sector banks could be a major deterrent for prospective investors. Fitch’s Guha said that public sector banks have a significantly different culture and more bureaucratic organisational practices relative to private banks.
“Similar challenges and the absence of meaningful investor interest resulted in the state ultimately having to sell its majority stake in IDBI Bank to LIC in 2019, which has somewhat been privatised in letter but not in spirit,” Guha said.
Finally, the government could be confronted with legislative hurdles. Unlike in the case of IDBI Bank’s sale to the Life Insurance Corporation (LIC) of India, the sale of other banks will necessitate amendments to the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, said Tuljapurkar. If opposition parties refuse to support such changes in legislation, the privatisation drive may face a major roadblock.