The proposal to privatise two state-owned banks in the current fiscal year, which ends in March 2022, could suffer delays, according to Fitch Ratings, as the Indian banking sector faces severe hurdles as a result of the second wave of Covid-19.
The government announced plans to privatise two public-sector banks in its budget. NITI Aayog has been entrusted with the task of selecting the banks and one general insurance company for the privatisation.
“The Indian government’s plan to privatise two state-owned banks in the current financial year (FY22, ending March 2022) could face delays amid renewed challenges for the Indian banking sector,” Fitch said in a statement.
Extension Of The Government’s Broader Agenda
According to Fitch, the present privatisation proposal is part of the government’s larger strategy to restructure the Indian banking system and lower the number of state-owned banks, which has decreased from 27 in 2017 to 12 in 2020 following three rounds of consolidation.
“Nonetheless, the bold move to privatise state-run banks faces risk from political opposition and structural challenges including heightened balance-sheet stress due to the Covid-19 pandemic, which is likely to keep bank performance subdued for the next two to three years,” it added.
Fitch believes that political support in favour of legislative changes to the Act, which are required to go through with the sale, could be a significant hurdle for the government.
“There could also be more resistance from the trade unions this time around, who will be against the safety-net withdrawal of state ownership. The success of the plan would also require sufficient interest from the investor(s) willing to acquire large stake(s) in state-owned banks and run them,” it added.
 Weak Performance Of State Banks
According to the rating agency, state banks have long been afflicted by a lack of investor interest due to structurally inadequate governance frameworks that have resulted in a chronically dismal performance, reflected in major asset-quality issues.
“State banks can also be difficult to manage. They have a significantly different culture and organisational practices (eg more bureaucratic) 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 privatisation in letter but not in spirit.
“However, this could change in 2021 if both government and LIC can divest a majority stake in the bank to an external investor, as it may be indicative of broader investor appetite in state banks with adequate loan-loss reserves.
Why Does Government Want To Privatise Larger Banks?
 To maximise divestment inflows, Fitch believes the government wants to privatise larger banks.
This will be difficult, however, because banks in this group have generally compromised financials, with impaired-loan rates, despite their broad reach and significant franchises.
“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 Reserve Bank of India’s prompt corrective framework,” Fitch added.
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