The privatization of IDBI Bank is important if the government wants to get good value when listing Life Insurance Corporation of India (LIC). Future investors do not like the idea of having an insurance company bank, a quarter of whom have defaulted on loans.
The history of capitalism is filled with people protesting whenever the status quo is disturbed. Given this, the strike plan of the bank unions is not surprising.
Take the story of James Hargreaves, an illiterate English cotton leader who lived in the 18th century. Hargreaves invented the spinning Jenny, one of the first inventions that led to the Industrial Revolution.
As Daniel Suskind writes in A World Without Work: Technology, Automation and How We Respond: “It’s a machine that allows the thread to spin very fast, not just with human hands.” Therefore, it led to job losses among the people hired to spin the cotton. Based on this, Suskind wrote: “His neighbors were outraged by what was being publicized about Hargreaves. [and] Demolished the machine. “
This time is no different. What happened in the beginning of capitalism is still happening now. The government’s decision to privatize the two PSBs will hurt the status of public sector banking employees who want to continue as government employees.
As everyone knows, the performance of PSBs over the years is not worth the money the government has invested in them. As the 2019-20 Economic Survey points out: “Over ₹4.3 trillion taxpayers’ money was invested in PSBs as government equity. In 2019, taxpayers lost an average of 23 paise for every rupee invested in PSBs. In contrast, every rupee invested in licensed new private banks after India’s 1991 liberalization received an average of 9.6 paise. “
This difference in performance is also reflected in the market capitalization of PSBs. US market value of HDFC Bank shares ₹8.56 trillion (as of February 18), the market capitalization of all PSBs is around ₹6.41 trillion (excluding IDBI Bank, which is now classified as a private bank). In fact, if we add the assets of PSBs, they are much larger than HDFC Bank.
Most of the market capitalization of PSBs is attributed to State Bank of India (SBI), the value of which ₹3.7 trillion. The rest is at PSB evaluation ₹2.7 trillion. This is much less than Kotak Mahindra Bank ₹3.85 trillion. To take this matter a little further, Kotak has a higher market capitalization than SBI, though the gap has narrowed of late. In terms of assets, Kotak is a small bank compared to SBI.
This difference in valuation is not a level playing field for private banks and PSBs. The former are controlled by the Reserve Bank (RBI), while the PSBs are controlled by the RBI and the Financial Services Division under the Ministry of Finance.
As the PJ Nayak Committee report of May 2014 points out: “For example, from October 2012 to January 2014, the Ministry of Finance issued 82 circulars to public sector banks. Private sector banks are without dual control. “
This is because PSBs are used by the government to fulfill its social responsibilities and for pump-prime when the economy is not working well. The stock market values these factors.
This is something that Indian politicians and policy makers need to realize. Former Indian Administrative Service Officer and current Maruti Suzuki Chairman RC Bhargava in his book Getting Competitive: A Practitioner’s Guide for India, as pointed out in the context of Japan: “Social content has nothing to do with regulating and promoting industrial growth. “Therefore, PSBs should be run as proper banks regardless of whether they are privatized or not. If they are not privatized, the government’s stake in these banks should come down to 33%, which will help them raise more capital.
After investors see PSBs running as proper banks, their market capitalization begins to grow, rather than government agencies trying to meet social goals. Once the PSBs are properly valued by the stock market, the government can sell some of its stake in them each year and use that money to fund its social goals. Not only PSBs, but also a portion of that money can be used to promote all banks to provide all social goals. At the end of the day, nothing improves service delivery than some good competition.
On the flip side, it should be remembered that the privatization of the banking sector is already underway, regardless of whether the government privatizes PSBs or not. In March 2010, PSBs accounted for 75.1% of India’s total debt. In September 2020, it fell to 57.3%.
Vivek Kaul is the author of ‘Bad Money’.