India will likely need to inject additional capital into any state-owned banks it puts on the market to make them attractive to potential buyers, and faces challenges ranging from the need to change the country’s banking laws to trade unions. hostile employees, analysts said.
Finance Minister Nirmala Sitharaman said in her budget speech in February that the government plans to sell two public sector banks and launch an initial public offering of shares in Life Insurance Company of India in the fiscal year ending March 31, 2022. Sales should make these Crown corporations more agile and help the government grow funds to close its yawning budget gap, which has worsened due to the trail of the COVID-19 pandemic.
The government has not disclosed the names of the two banks it plans to sell. However, local media reports identified the Central Bank of India and Indian Overseas Bank as likely candidates, citing senior officials and recommendations from a government think tank. Bank of India Ltd. is another lender that the government can sell in a multi-step process.
“Selling stakes in these banks will be difficult due to their poor financial performance and low equity valuations, ”said Nikita Anand, analyst at S&P Global Ratings. “The process of amending banking laws to facilitate equity sales and union relations could take a long time.”
The proposed sales are part of the government’s efforts to reform the state-dominated banking system, which has been plagued by an increase in bad debts and problems with profitability. As part of his efforts, he led three rounds of mergers among state banks to make them bigger and better, reducing their total number to 12 from 27 in 2017. Given the weak finances of banks, the Countries continued to inject capital to help them expand their lending, especially to priority sectors that private sector banks often find less lucrative. In total, it has invested 3.5 trillion rupees in capital in state banks over the past five years, Anurag Singh Thakur, then deputy finance minister, said in February.
“While the government’s precarious fiscal position may not allow for a substantial pre-sale recapitalization to improve their attractiveness to investors, it could nonetheless make public sector banks more attractive by resolving larger bad debts before the sale so that investors are clearly aware of their liabilities. would be, ”said Alok Sheel, RBI Professor of Macroeconomics at the Indian Council for International Economic Relations Research, a New Delhi-based think tank.
Before a sale, the government will have to change the banking laws that require it to keep a minimum 51% stake in public banks. While Finance Minister Sitharaman has said the government will bring forward legislative amendments for privatization, he has yet to present the bills to parliament. Opposition political parties and bank workers ‘unions, including India’s main bank workers’ association, have pledged to oppose the plan, citing concerns over job security.
“For potential foreign investors, India and Indonesia are the only authentic banking stories from emerging markets in Asia. … But why would a foreign investor looking for exposure to India’s growth story shy away from private sector banks that have demonstrated their competitive edge through steady market share gains over the years. time towards banks that have lost market share and pose a series of legacy challenges, “said Chris Mallin, founder of macro-consulting firm CMMP Advisory. Mallin has been analyzing and investing in Indian financial services since the early years. 90.
Privatization can happen through an injection of capital by another state-owned company, a bailout by a foreign bank, or an injection of capital by a strategic investor, Jefferies said in a note after the budget announcement. He cited the precedence of the government company Life Insurance Corp. taking a majority stake in IDBI Bank Ltd. in 2019. In November 2020, Singaporean DBS Group Holdings Ltd., under a deal offered by the central bank, acquired distressed Indian lender The Lakshmi Vilas Bank Ltd.
Jefferies noted that the asset quality of Indian state-owned banks has improved as the majority of distressed loans are recognized and the banks are “reasonably capitalized”. It can help attract investors. “Although these banks have lost share in loans, many of them have been successful in developing their retail deposits well, especially in the post-COVID era, as they have gained due to risk aversion ” , according to Jefferies.
However, state-run banks, especially lenders who may be on the block, still struggle to make a profit. Aanalysts say the government may have to spend money to consolidate its capital before any sale.
Indian Overseas Bank reported profit in the fiscal year ended March 31 after reporting losses for at least two fiscal years, while the Central Bank of India reported losses for the past three years. The return on average equity of the Indian Overseas Bank improved to 5.04% in March from 59.05%, while the ROAE of the Central Bank of India remained in negative territory over the three last years. At the same time, the ratios of Tier 1 ordinary shares of the two banks improved to 12.91% and 12.82%, respectively, in March, from 8.21% and 9.33% in the previous year, based on data from S&P Global Market Intelligence.
“The government will have to inject money to make the sale more acceptable. So the net amount he can receive from the sale is relevant, ”said Hemindra Hazari, Mumbai-based independent banking analyst.
Instead, the government should continue to capitalize its lenders as they play a key role in financing infrastructure projects and in accessing banking services in economically weaker remote areas of the country. “The government shouldn’t sell banks just to show its reform credentials. In fact, the government should dominate the sector,” Hazari said. “If the country needs more government spending, it should just do it, rather than focusing on the budget deficit, which is just a number.”
India’s budget deficit stood at 9.3% for the fiscal year ended March 31, significantly higher than the 3.5% the government had forecast for the year, mainly due to the COVID pandemic -19. For the current fiscal year ending March 31, 2022, the government expects the budget deficit to decrease to 6.8%.
Shares of public lenders likely to be sold have increased this year. Since the beginning of the year, the actions of Indian Overseas Bank, The Central Bank of India and the Bank of India won 141.91%, 85.11% and 50.15%, respectively.
As of July 12, US $ 1 was equivalent to Indian rupees 74.56.