Why it may not be possible to privatise PSBs

The sheer magnitude, caused by uneven market shares, can pose a challenge

The inability of the government to run businesses efficiently is usually the rationale for calls to privatise them. This has played out endlessly in India with Air India being the most recent example.

But banking is different in many ways, which is probably why it has resisted for so long. However, with the seemingly endless exposure of frauds, the demands for their privatisation now may sound intuitive. After all, private banks operating in the same environment have done well and are valued by markets, while public sector banks (PSBs) have not only fared poorly, but also sullied their reputation.

But there are key differences between the two — some obvious and some not— that could make privatisation difficult.

Primarily, the sheer magnitude, caused by the uneven market shares, can be an issue — PSBs (excluding SBI, which is sought to be kept out) account for over 45 per cent of deposits and loans, and 64 per cent of all NPAs.

If the ₹48,000-crore debt of Air India is seen as a stumbling block, the over ₹5-lakh-crore (and counting) NPA portfolio of PSBs (excluding SBI), will be a more daunting prospect.

Specifically, there are at least three areas where magnitude can pose challenges.

Where PSBs differ

India has one of the largest branch banking networks (over 1,40,000 branches), and PSBs (excluding SBI) own nearly half of them. This legacy from the past is coming back to bite now in an era of digital and branchless banking. All the more because over 60 per cent of the branches are in rural and semi-urban areas where the volume of business does not justify the operating costs (PSBs, minus SBI, own over 45 per cent of such branches).

There is also the problem of scale. While loans at these branches contribute to only a fifth of the total credit, the number of borrower accounts is huge — nearly 60 per cent of the total — translating to high monitoring costs.

No doubt, private banks had also expanded their network, but they managed a nearly equal mix of rural and urban branches, thereby muting the impact. By taking on such a huge network, private players will have a tough act, balancing between viability and the requirement to reach out and service existing customers.

Lending portfolio

Even the he composition of lending portfolio has significant differences. The task of financing core industries — textiles, iron and steel, utilities and infrastructure, to name only a few — has fallen almost entirely on PSBs, while private banks have preferred to lend to more profitable and less risky sectors such as retail and services.

Will this strategy of private banks change in the future after inheriting a large industrial portfolio? That will be a moot question.

Even in priority-sector lending, many private banks have managed to achieve their targets by investing in tradable priority-sector lending certificates (sold by PSBs). It would be interesting to see how private players sustain large levels of directed lending.

But perhaps, the most striking difference is in the workforce. The banking sector employs around 1.3 million people, 43 per cent of whom are in PSBs (excluding SBI). The differences become more striking when it comes to composition and productivity of the labour force.

The workforce of PSBs, excluding SBI, is predominantly non-managerial (over 52 per cent), whereas 90 per cent of the workforce in private banks is managerial. Depending on how the banks deal with it, the composition and productivity differences could pose a huge challenge to privatisation.

Other issues

There could be other issues. The government borrowing programme has traditionally depended on PSBs, which explains why they hold 45 per cent share of the G-sec market (excluding SBI).

PSU portfolios have a large proportion of long-dated securities, exposing them to greater interest-rate risks. Private players, used to churning portfolios to realise profits, could find their treasury skills put to test by taking on such a large portfolio.

In the final analysis, ownership need not be an issue. The government, perhaps aware of the larger issues, has not been so keen on privatising banks.

But by being blasé about its inability to run banks efficiently, it has created a perception of being an unconcerned owner, fostering the lack of accountability that seems so pervasive in the system. For starters, it need look no further than the recommendations of its own PJ Nayak committee from some years ago.

The writer is an independent consultant.

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