Tag: Privatisation | Vivek Kaul

3 April, 2018

India’s Banking is Getting Privatised Without the Govt

Indian_ten_rupee_coin_(2008_Reverse)
“Should public sector banks be privatised?” is a question that is being thoroughly debated these days. Arguments have been offered from both sides.

Those against the idea of public sector banks being privatised like to say that private sector banks also make bad lending decisions and end up with bad loans. Of course, that is true. In the business of banking, some loans are bound to go bad. A bad loan is essentially a loan on which the repayment has not been made for 90 days or more.

Nevertheless, the more important point is what proportion of the loans have gone bad. As of March 31, 2017, the total bad loans of public sector banks stood at Rs 6,41,057 crore. In comparison, the total bad loans of private sector banks stood at Rs 73,842 crore.
Hence, the bad loans of private sector banks amounted to around 11.5% of bad loans of public sector banks. But just looking at bad loans in isolation isn’t really the correct way.
We also need to look at the total advances or loans of these banks.

As of March 31, 2017, the total advances of public sector banks stood at Rs 55,57,232 crore. The total advances of private sector banks stood at Rs 22,19,563 crore, or around 40% of advances of public sector banks.

If the private sector banks were doing as badly as public sector banks on the bad loans front, there bad loans should also have been around 40% of the total bad loans of public sector banks. But that as we saw is clearly not the case. The bad loans of private sector banks are at 11.5% of the bad loans of public sector banks.

This basically means that the private sector banks operate much more efficiently than public sector banks. Hence, the argument that public sector banks should not be privatised because private sector banks also accumulate bad loans, doesn’t really hold.

But that isn’t the major point that I wanted to make in this column. What people who suggest that public sector banks should not be privatised do not realise is that the banking sector in India is getting privatised on its own, even though the government continues to own 21 public sector banks. Take a look at Table 1.

Table 1:

Total advances As on March 31	Public Sector Banks	Private Sector Banks	Ratio (Total advances by private sector banks to total advances by public sector banks) (in %)
2012	38,77,307.31	9,66,402.95	24.92%
2013	44,72,844.65	11,43,248.58	25.56%
2014	51,01,053.95	13,42,934.61	26.33%
2015	54,76,249.54	15,84,311.86	28.93%
2016	55,93,576.78	19,39,339.43	34.67%
2017	55,57,231.63	22,19,563.01	39.94%

Source: Author calculations based on data from Indian Banks’ Association

Now what does Table 1 tell us? As on March 31, 2012, the total advances of private sector banks were around a fourth of the total advances of public sector banks. By March 31, 2017, this ratio had increased to 40%.

This basically means that as public sector banks go slow on lending because of their bad loans, the total loans given out by private sector banks are growing at a much faster pace. Hence, as far as the overall banking sector is concerned, it is getting privatised, irrespective of what the experts and the government think about privatising public sector banks.

In fact, the situation is not very different from other sectors which the government has opened up for private companies over the years. Take a look at what happened to the airlines sector. Air India and Indian Airlines (before they were merged) had 100% of the market (along with Vayudoot, another government owned entity). Now Air India (in which the erstwhile Indian Airlines has been merged) has 13.8% of the market share. This has benefitted the consumers tremendously.

Similar stories of privatisation, without the government privatising public sector enterprises, have played out in the telecom and pharmaceutical sectors, respectively, and even in education, to some extent.

The telecom sector had two players BSNL and MTNL. Over the years, the market share of these two government owned companies, has come down dramatically, while the government continues to own them.

Over the years, various ministers have referred to public sector enterprises as family jewels. The trouble is that in sector after sector, these family jewels have lost their lustre and a tremendous amount of value has been destroyed.

Along similar lines, public sector banks have reached a stage where it will be difficult to find buyers for many of these banks, even if the government makes a decision to privatize them (which in the first place seems very difficult).

The 1997 Committee on Banking Sector Reforms (better known as the second Narasimham Committee) had recommended that the government reduce its holdings in PSBs to 33 per cent and, in the process, give increased autonomy to these banks. The Committee had also recommended no further recapitalisation of public sector banks by the government. But that is not how things have eventually turned out.

And more than two decades later, now we have reached a stage where most of the public sector banks are as dead as a dodo.

The column was originally published on Firstpost on April 2, 2018.

4 November, 2015

IDBI Bank’s privatisation will be a test case for Modi govt

Several news items in the last few days seem to suggest that the Narendra Modi government has plans of privatising IDBI Bank. A newsreport in The Economic Times talks about a “high-level committee headed by the cabinet secretary that will oversee strategic divestments”. The report also said that the “the first proposal likely to be examined by the panel will be the sale of the government’s stake in IDBI Bank to convert it to a private bank.”

The minister of state for finance Jayant Sinha had hinted at something similar last week when he told the media that “we’ll consider transforming IDBI Bank in a manner similar to the way Axis Bank was done.”

IDBI Bank is among the bigger public sector banks. It is the fifth biggest public sector bank in terms of market capitalisation. It is the seventh biggest in terms of total assets. But it’s the tenth biggest in terms of net profit.

The gross non-performing assets (bad loans) of the bank have been going up over the years. As of March 31, 2009, they stood at 1.38%. By March 31, 2015, they had jumped to 5.9% of total assets. Over and above this, the bank also had restructured assets (where the tenure of the loan or the interest on the loan has been changed in favour of the borrower) worth Rs 20,900 crore as on March 31, 2015. The number had stood at Rs 3,100 crore as on March 31, 2009.

The restructured assets as well as bad loans of the bank have grown at a fairly rapid rate. This clearly tells us is that the restructured assets are turning into bad loans in the time to come. The bank, like many others, has used the restructured assets route to kick the ‘bad loans can’ down the road.

The accumulation of bad loans has essentially led to a situation where the net profit of the bank has gone nowhere over the last six years. The net profit for the financial year ending March 31, 2009, was at Rs 859 crore. Six years later, the net profit for the financial year ending March 31, 2015, stood at a similar Rs 873 crore.

Flat profits due to an increase in bad loans essentially explains why the bank is seventh largest public sector bank when it comes to total assets but tenth largest when it comes to profit. In fact, flat profits have essentially led to a situation where the return on assets as well as return on equity of the bank have fallen dramatically over the years. The return on assets has halved from 0.6% as of March 2009 to 0.3% as of March 2015. The return on equity has totally collapsed from 12.1% to 3.9% during the same period.

Currently, the government owns 76.5% in IDBI Bank and any serious plan of privatisation would mean the government bringing down its stake in the bank majorly in the time to come. In fact, the government holding in the bank has gone up “from 65.14% in July 2010 to 76.5% in December 2013 by total equity infusion amounting to Rs 5,300 crore”.

There are several reasons why the government should privatise IDBI Bank. First and foremost as I have said in the past, there is no reason that a government should be running 27 public sector banks. There are other more important areas that need its attention.

Second, the return on equity on the government’s investment in the bank has fallen dramatically over the years. At 3.9%, it is lower than even the 4% interest that banks pay on their savings bank account. Hence, the government is not being adequately compensated for the investment risk.

How will privatisation help? As TN Ninan writes in The Turn of the Tortoise—The Challenge and Promise of India’s Future: “The last quarter century’s experience has shown that when the private sector is asked to provide telecom services, run airlines and airports, build and run ports, undertake banking, distribute electricity and even undertake water supply, the result is usually (though not always, for there is no shortage of private banks and airlines that have failed) a substantial improvement on what, the government was doing until then.”

This becomes clear from the fact that in the last financial year (April 1, 2014 to March 31, 2015) the private sector banks operating in India made a total profit of Rs 38,219.35 crore. In comparison, the public sector banks made a profit of Rs 37,820 crore.

This despite the fact that the total assets of private sector banks form only around 29.2% of the total assets of public sector banks. Assets owned by private sector banks in India form only 22.6% of the total assets owned by banks in India. Despite this, they are more profitable than public sector banks.

Interestingly, the total profit of public sector banks for the financial year ending March 31, 2013(April 1, 2012 to March 31, 2013), had stood at Rs 50,583 crore. Since then it has fallen by 25.2% to Rs 37,820 crore. The profit of private sector banks has jumped by 31.8% (from Rs 28,995.43 crore) to Rs 38,219.35 crore.

Between 2013 and 2015 as the economic scenario has gotten worse, the public sector banks have faltered big time. Meanwhile, the private banks have continued to increase their profits.

IDBI Bank as on March 31, 2015, had Rs 3,56,031 crore worth of total assets. As pointed out earlier it made a net profit of Rs 873 crore during the course of the financial year. Now compare this to Kotak Mahindra Bank which had total assets worth Rs 1,06,012 crore as on March 31, 2015. It made a net profit of Rs 1,866 crore, which was much more than that of IDBI Bank. Similar numbers can be put forward for other private sector banks like IndusInd Bank and Yes Bank as well, in comparison to those of IDBI Bank. These banks are significantly smaller than IDBI Bank but make much more money. [Data sourced from Indian Banks’ Association]

The government’s 76.5% stake in IDBI Bank is currently worth Rs 10,380.6 crore. If it privatises the bank, chances are whatever equity that it chooses to retain in the bank will end up being worth much more than it currently is, in the days to come.

The question is will the government get around to privatising IDBI Bank? The employees of IDBI Bank have called strike on November 27, later this month, to oppose the government’s move to privatise the bank. This shouldn’t stop the government from privatising the bank. The good part is that unlike a systematically important institution like Coal India, the employees of IDBI Bank have a limited nuisance value. Hence, a strike by IDBI Bank is not going to hurt many others. And this should help push through the decision.

Further, the government shouldn’t stop at IDBI Bank. This will be a test case for it on whether it will be able to continue privatising other public sector enterprises in the years to come.

There are many public sector enterprises which the government has no reason to own.

Like Mahangar Telephone Nigam Ltd.

Like Air India.

The column originally appeared on The Daily Reckoning on Nov 4, 2015

3 November, 2015

Disinvestment: The more things change, the more they remain the same

When finance minister Arun Jaitley presented the budget of the Narendra Modi government in February 2015, he set an aggressive disinvestment target of Rs 69,500 crore. Disinvestment refers to the government selling the shares it holds in public sector companies.

In late October, this aggressive disinvestment target was given a quiet burial.

A series of statements have been made in order to justify the slashing of the disinvestment target. “The target of Rs 30,000 crore seems more reasonable for current fiscal given that there is no big stock to sell,” a source told The Economic Times.

The minister of state for finance Jayant Sinha blamed it on the falling and low commodity prices. As he recently said: “One of the reasons why the divestment process is challenging right now is because many of the companies we are considering for divestment are in the commodity industries…Whether it is Coal India or OMCs (Oil Marketing Companies) and so on. They are impacted by global commodity prices.”

Sinha’s boss Jaitley more or less came up with the same reason when he said: “I don’t think it makes sense divesting at a time when [commodity] prices are low.”

How much sense does this argument make? Did commodity prices start to fall from March 1, 2015, a day after the budget was presented? On May 26, 2014, when Narendra Modi was sworn-in as the prime minister of India, the price of the Indian basket of crude was $108.05 per barrel. By February 27, 2015, a day before Jaitley presented the budget, the price of the Indian basket of crude oil had fallen by 44.6% to $59.85 per barrel. Hence, the price of oil had already been falling for a while at the time the budget was presented. The price of the Indian basket of crude oil is currently at $44.72 per barrel.

In fact, oil was not the only commodity falling. As an editorial in The Financial Express points out: “Similarly, in the case of copper, prices were $8,061/tonne in February 2013, $7,149 in February 2014 and $5,729 in February 2015—prices are down to $5,142.5 now. In the case of zinc, prices fell from $2,129/tonne in February 2013 to $ 2,034.5 in February 2014 and rose a bit to $2,098 in February 2015—prices are down to $1,687 now.”

So commodity prices were falling even in February when the government presented the budget. Why offer the reason now? Sinha offered another explanation as well: “Obviously, we have to ensure that we get best possible valuation for these valuable enterprises,” he said.

What does he mean here? On February 27, 2015, the BSE Sensex had closed at 29,220.12 points. Since then it has fallen by around 9.1% and closed yesterday (November 2, 2015) at 26,559.15 points. This is not such a big fall in the context of the stock market.

In fact, Jaitley had clearly pointed out in June earlier this year that a fall in the stock market would not lead to the government going slow on the disinvestment programme. As Jaitley had said: “I don’t read too much on daily movements as far as markets are concerned. By and large with the health of economy recovering, I see much greater stability as far as markets are concerned. And therefore, the disinvestment programme of the government will continue as it has been planned.”

So, if Jaitley was not reading too much into daily movements of the stock market in June, why is Sinha (and by that definition Jaitley as well) reading too much into the daily movements of the stock market, now?

Also, when an aggressive disinvestment target of Rs 69,500 crore was set, wasn’t the chance that the stock market will ‘fluctuate’ taken into account?

And why has all the optimism that was being projected on the disinvestment front by the government ‘suddenly’ evaporated now?

The stock market had touched a level of 26,500 points (as it is now) even in June earlier this year. So what has changed between then and now?

The broader point here is that the logic of commodity prices falling offered by the government to go slow on disinvestment now, was valid even at the time of presenting the budget. As The Financial Express edit quoted earlier points out: “If the government still went ahead and set an aggressive target for FY16[ 2015-2016], this implied it planned to be selling shares regularly, irrespective of the price—clearly that was an incorrect perception.”

Up until now the government has managed to disinvest shares worth only Rs 12,700 crore. Of this Rs 8,077 crore has come from the Life Insurance Corporation of India. So, there hasn’t been much disinvestment in the strictest sense of the term, nearly seven months into the financial year. What this tells us is that the government was not serious about disinvestment in the first place.

Given this, it is not surprising that the government has now decided to slash the disinvestment target. In fact, this has been a regular feature with almost all governments since disinvestment of public sector shares came to the fore in the early 1990s.

As AK Bhattacharya writes in a recent column in the Business Standard: “Since disinvestments of government equity in PSUs began in 1991-92, only on two occasions has a government met its target set at the start of the year. In the last year of the Narasimha Rao-led Congress government in 1994-95, total disinvestments of Rs 4,843 crore exceeded the target of Rs 4,000 crore set for that year and in the first year of the Atal Bihari Vajpayee-led government in 1998-99, total disinvestment proceeds were estimated at Rs 5,371 crore, compared with the target of Rs 5,000 crore.”
Of the total disinvestment target of Rs 69,500 crore, the government had budgeted Rs 28,500 crore to come in from the strategic sale of equity, which was basically a euphemism for privatisation. Nearly seven months into the financial year the government has given only given some indication of privatising IDBI Bank.

In this reluctance to privatise and continue holding on to companies, Narendra Modi is only following the Congress governments before him. In fact, TN Ninan makes an excellent summary of the way things stand as of now in his book The Hare and the Tortoise—The Challenge and Promise of India’s Future: “It is a matter of regret that Narendra Modi, who got elected on the promise of ‘minimum government, maximum governance’, has shown no taste for radical change or minimizing government…The government system continues to run loss-making airlines and hotels, three-wheeler units and Mahanagar Telephone Nigam, whose sales revenue is less than 40% of expenditure.”

Meanwhile, as I sit writing this column, its one am in the morning and one of the TV channels is replaying Modi’s election speech in Bihar.

As the old saying goes, the more things change, the more they remain the same.

(The column originally appeared on The Daily Reckoning on November 3, 2015)