Two public sector banks and one general insurer are to be privatised. It marks a big shift in approach, because privatisation of banks has been a politically tricky issue. A large unionised workforce will oppose it and none of the political parties have a constituency within that believes in privatisation. Therefore, the signal on privatisation through the Budget by the Narendra Modi government is very positive. There’s a catch, though. Earlier attempts at privatisation show that just intent isn’t enough to pull it off. Intent needs to be backed by sound strategy.
India’s public sector banks have seen change in the last three years after the government tried to build scale through mergers, and also bring a wider geographical footprint under each bank. After three rounds of consolidation public sector banks have shrunk from 27 in March 2017 to 12 in April 2020. Now, two are to be privatised. This presents a tricky situation as the government doesn’t want to exit commercial operations in the financial sector. It’s been identified as a strategic sector where the government wants to retain a “minimum” presence.
It may be tempting to retain the better run and profitable public sector banks and try to sell the weakest. Such an attempt is unlikely to succeed. For example, the attempt to sell Air India three years ago didn’t attract a single bid, because the attached conditions were unattractive. Poor management of banks may have rendered the weakest of them unattractive for any buyer. If the government’s aim is to restrict its presence to a bare minimum, it’s best to begin privatisation with sounder banks. Bids shouldn’t be restricted to Indian buyers as foreign banks have been present in India for long. It’s important to make a good beginning.
This piece appeared as an editorial opinion in the print edition of The Times of India.
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