PSU banks: Any takers?

 

It is reported that after Finance Minister Nirmala Sitharaman’s Budget announcement, the NITI Aayog had suggested a couple of banks for privatisation to the Core Group of Secretaries on Disinvestment headed by Cabinet Secretary in April.

The government is introducing a Bill in Parliament to enable privatisation of PSU banks. Bank unions are opposing the move. It seems the government plans to privatise Indian Overseas Bank and Central Bank of India.

The Bill may be passed but the real challenge will be known only when the government starts executing the move.

Central Bank of India has a market cap of around ₹19,600 crore and Indian Overseas Bank’s (IOB) market cap is at ₹41,100 crore. The government’s holding in Central Bank is 93.08 per cent and in IOB it is 96.38 per cent.

To realise the value as per market price the government should be able to sell these banks for ₹18,200 crore and ₹39,600 crore.

Since private industrial houses are not allowed to own banks, they are not in the fray. So the prospective buyers have to come from the existing private commercial banks or private payments banks and private small finance banks. Some NBFCs may also be in the fray.

Payments banks are already having a tough time as they cannot lend and there is a cap on per customer deposit. As a result many of them are considering to convert into small finance banks. Payments banks and small finance banks do not have the financial muscle to buy PSU banks. When the RBI allowed well run NBFCs with assets of ₹50,000 crore and above and 10 years of operations could be considered for conversion into banks, NBFCs were reluctant to take up that proposal.

So PSU banks are likely to be sold to new generation private banks. But will these banks be interested? The work culture of PSU banks with a huge manpower may deter them.

Apart from profitabilility PSU banks have other objectives such as financial inclusion. Though the government banks also aim for profitability, they predominantly function to serve common man. But the private banks’ main goal is shareholders’ wealth creation. This model results in the government banks having huge manpower strength.

The Finance Minister has assured that PSU banks’ employees interests will be taken care during privatisation. Hence there cannot be any retrenchment of staff and all the existing industrial level wage settlements will prevail.

Staff Issues

As of March 2021, IOB has a staff strength of 23,579 and its business per employee is ₹15.6 crore. Net profit per employee is ₹3.52 lakh. For Central Bank the staff strength is 32,335 and its business per employee ₹15.04 crore. Net loss per employee is ₹2.74 lakh.

Now compare this with private banks. ICICI Bank’s per employee business is ₹16.87 crore and per employee profit is ₹16.40 lakh. The corresponding figures for HDFC Bank are ₹20.54 crore and ₹25.91 lakh.

The government banks have obligation of pension payment to its retirees. Though the banks have adequate pension fund as per actuary estimation to take care of the future obligation, the prospective buyer may not be comfortable as there is some amount of uncertainty of future obligations.

Since the ICICI Bank, HDFC Bank and Kotak Mahindra Bank have huge staff strength, adding more employees and aligning them with the new work culture while buying a PSU bank may be a challenge.

ICICI Bank staff strength is around 98,000 and HDFC Bank staff strength is around 1,20,000. Kotak Mahindra Bank staff strength is around 71,000. So if the government bank is taken over these banks or by any other private banks, the staff addition will be huge and it will be a challenge to transform them all to the new culture.

It is also not clear why the government wants to sell these banks. If it is to mop up resources, then it can very well reduce the government shareholding to just 51 per cent and off load the balance to the public.