Not a panacea

Based on the recommendations of NITI Aayog, the Central government can privatize two public sector banks, namely, Central Bank of India and Indian Overseas Bank. The government, in the budget presented on February 1, 2021, had set a target of privatisation of two public sector banks and one government insurance company during the financial year 2021-22. To complete the process of privatisation, the government will have to make changes in the banking laws. Therefore, the Central government has been making efforts to introduce Banking Laws (Amendment) Bill, 2021, in the Parliament. Through this bill, amendments will be made to the Acquisition and Transfer of Banking Companies Act, 1970 and 1980. In addition, the Banking Regulation Act, 1949 will also be amended. Through the Banking Laws (Amendment) Bill, 2021, the minimum government stake in public sector banks will be reduced from 51 per cent to 26 per cent.

At present, the shares of Central Bank of India and Indian Overseas Bank are valued at around Rs 44,000 crore. The market cap of Indian Overseas Bank is Rs 31,641 crore, while that of Central Bank of India is Rs 12,359 crore. In this way, the government will get its capital back by selling its stake in these banks. However, it is not possible to say how long it will take for the government to sell its stake. The value of this capital will depend on the market conditions at the time of the sale of stake by the government and the underlying strength of the bank, such as the number of branches and customers, and the level of business and NPAs, among other things.

After privatisation of the banks, the government will not need to infuse capital in these banks, which will help the government to strengthen its financial position. Moreover, the government departments like the Ministry of Finance, Central Vigilance Commission etc. will not be required to conduct supervision of these institutions, which will save both human resource and Bank's money. As per the government, the acquirer who bought the stake of these two government banks, will be able to operate the bank more efficiently.

The government's stake in Indian Overseas Bank is 95.8 per cent, while that in the Central Bank of India it is 92.4 per cent. It is believed that the government will bring down its stake in public sector banks to 51 per cent and then bring it down to below 50 per cent, in order to sell those in a smooth manner.

After privatisation, the employees working in both the government banks may lose their jobs, which can have a negative impact on the welfare image of the government. Due to the insecure future, the employees will not be able to do their work diligently, which will affect the performance of these banks. Service charges of these banks will also increase. These banks will also refrain from serving in rural areas. They will also be reluctant to implement government schemes. These banks will also not want to do work related to low remunerative services like pension distribution, implementation of Atal Pension Yojana & Sukanya Samridhi Yojana etc. Banks can provide non-banking services like mutual funds, insurance etc. to increase revenue. After privatisation, the level of credibility in the mind of customers towards these banks may also decrease, as recently Yes Bank and Punjab and Maharashtra Co-operative Bank (PMC) have sunk. The public sector banks have an important contribution in giving shape to government schemes. Therefore, privatisation of two public sector banks will increase the pressure on the remaining public sector banks to implement government schemes. Also, the remaining government bank employees will work under pressure for fear of losing their jobs, which will also affect their performance.

Both the banks proposed for privatisation are small in size. There are 33,000 employees in the Central Bank and 26,000 in the Indian Overseas Bank. Of these two public sector banks, Indian Overseas Bank had earned a net profit of Rs 831 crore in FY 2021 after 6 years, while it had a net loss of Rs 8,527 crore in FY 2020. At the same time, the Central Bank of India had a loss of Rs 887.58 crore in the financial year 2020-21. However, both these banks have had a great performance in the second quarter of the current financial year. The Central Bank of India reported a 20 per cent increase in net profit to Rs 161 crore in the second quarter of the current financial year. The bank had reported a net profit of Rs 134 crore in the same quarter a year ago. The total income of the bank during this period grew by almost 2 per cent to Rs 6,833.94 crore as against Rs 6,703.71 crore in the year-ago quarter. The bank's operating profit grew 42.16 per cent to Rs 1,458 crore from Rs 1,026 crore a year ago. The bank's gross non-performing assets (NPAs) declined to 17.36 per cent of gross advances from 19.89 per cent in the year-ago quarter, while net NPA declined to 5.60 per cent, from 7.90 per cent in the year-ago quarter.

Indian Overseas Bank's net profit more than doubled to Rs 376 crore in the second quarter of the current fiscal from Rs 148 crore in the corresponding quarter of the previous fiscal. The bank also came out of the Reserve Bank's Prompt Corrective Action (PCA) purview during the period under review. The total income of this bank in the second quarter was Rs 5,376 crore, which was Rs 5,431 crore in the same period a year ago. The bank's net NPAs on total advances stood at 2.77 per cent as on September 30, 2021, from 4.30 per cent a year ago. The bank's NPAs in amount declined from Rs 5,291 crore to Rs 3,741 crore, while the gross NPA declined from 13.04 per cent (Rs 17,660 crore) to 10.66 per cent (Rs 15,666 crore).

In March 2017, there were 27 public sector banks in the country, whose number after the merger came down to 12 in April 2020, while the number of private banks in the country is 21 now. After the privatisation of the proposed public sector banks, the number of public sector banks will be reduced to 10 and the number of private banks will increase to 23. Even though the government is privatising two public sector banks, I feel that privatisation cannot be considered a panacea for existing problems, which government banks are facing. Recently, the performance of public sector banks has improved, while the performance of private banks has shown a decline. Many private banks have sunk. The latest case is of Yes Bank and PMC. How private and government banks have performed during the pandemic is not hidden from anyone. A few thousand crores can certainly be obtained from the privatisation of public sector banks, but how much the government will benefit from it also needs to be assessed. It is not necessary that the profit should be in cash. There is also the question of loss of employment and increasing work pressure on the employees of remaining public sector banks.

Views expressed are personal