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Is it the Government's Job to run a Bank?

The Story:

The FM in her budget speech had announced that the government plans to privatize two PSU Banks in the FY2021-22 and related to which on Monday, there have been reports claiming that the government has shortlisted four PSU banks namely, Bank of Maharashtra, Bank of India, Indian Overseas Bank and Central Bank of India. These names were not announced in the budget and also it is not an official announcement. This move comes as the government plans to raise money by selling the stakes of the government in these PSUs. What exactly is it and how does it look strategically we shall look upon everything so let's start.

Why does the government want to privatize the PSU Banks?

Well, you won't need us to explain this to you after you look at this:

The losses of these banks for FY2020.

Bank of India: ₹3,051.04 crores

Central Bank of India: ₹1,255.71 crores

Indian Overseas Bank: ₹8,527.40 crores

It is a total mess, isn't it?

What is going on with PSU Banks?

7 out of 12 PSU Banks have collectively made a loss of ₹21,369 Crores in FY2020, and it excludes the losses of IDBI Bank, which is re-categorized as Private Bank by the RBI. But that's not all, apart from these 7 PSU Banks, others are also not consistently profitable.

And that's not it. These are the numbers of the existing PSUs. Before April 2020 there were 27 PSU Banks some of which were merged with one another to form the current 12 PSU banks and they being PSU banks, people have trusted them with their hard-earned money, and thus the government needs to constantly pump money to keep these banks alive.

Capital Infusion by the Government in these banks for FY2020:-

Punjab National Bank: ₹16,091 rores

Bank of Baroda: ₹7,000 crores

Union Bank of India: ₹11,768 crores

Canara Bank: ₹6,571 crores

Central Bank of India: ₹3,353 crores

Indian Overseas Bank: ₹4,360 crores

IDBI Bank: ₹4,557 crores

This situation is just like you having a Saala like Sundar which keeps on making losses for you but can't be cut off from your life.

What could be the reason, for such huge losses you might think. And probably you do know the answer as well. Non-Performing Assets (NPA) or Bad-Loans have found a comfy place in these PSU Banks.

Back in 2019, FM Nirmala Sitharaman informed Lok-Sabha that the total number of willful defaulters stood at 8,582 at the end of FY19, against 5,349 at the end of FY15 while.

(A willful defaulter is someone who has Financial Resources to pay back the loan but does not do so)

According to the latest Financial Stability Report by RBI, the gross NPA ratio of all commercial banks may rise to 13.5% by September 2021, from 7.5% in September 2020 under the baseline scenario. More NPAs means more the amount of money the government will need to pump in.

Why privatize these banks?

The government has been very clear about its plan to revolutionize the banking sector & clean its hand from PSU Banks as soon as possible and thus these mergers and now the plans to privatize them. The government being clear about its plan to limit down the number of banks it would keep with itself, there has been a general acceptance that privatization is mainly carried out to improve the efficiency of the sector/organization. The single main reason being, the profit-driven mindset. And PSBs are not profit-driven but focuses more on expanding the banking & allied services to more and more people. The main motive is to provide people with low-cost banking services to make people participate in banking. While on the other hand, private banks have the single most objective - profit but while also optimizing their services. Also, the privatization of these banks would be an additional income for the government, which will help them fill the gap between the huge spending this year against the revenues.

Ghar me Paisa Nahi hai?

Koi naa, Ghar me jo hai Bech do!

Who wants to acquire these loss-making banks?

Well, that will remain the question because absorbing the losses of these banks would not be a cup of tea of every capitalist. We know how the sale of Air India is getting delayed due to the massive debt that it has and nobody knows what will the process like, of disinvesting from these banks.

What can be the possible effect?

As the sources of the news said, the privatization of these two mid-sized banks is just for testing the waters, and to see the response, the government does have plans to privatize more banks. With the current number at 12, can we expect just 2-3 major PSU banks? Only the time, implementation, and the sentiment of the bankers will tell.

What we can do is to try to guess the possible effects of this decision. One effect is that the efficiency of the Banking Sector will improve because PSUs are generally inefficient against the private players. Take an example of PGVCL or state-run electric providers and compare it with Adani Power or Tata Power.

The other effect is to see a decrease in NPAs. State-run banks have the most NPAs. The reason? Can't point. Private Players like HDFC or Axis have fewer NPAs as compared to PSU banks.

On the flip side, rural expansion of banking services could take a hit because private players aren't interested in reaching out to the farthest points but only profitable investments so they are less likely to open a branch in a rural area. So this is one flip side that can be tackled if the remaining PSU Banks become robust with this.

The other most concerning disadvantage is what about the current employees in these PSU banks? The most important question that hangs like a sword amongst the employees of these banks is what about them?

Will the government be able to make arrangements for an additional workforce in other PSU banks or other sectors?


Will the existing employees still be employed in the private banks but without the benefits which are available to PSU Bank Employee.

With these banks being shortlisted for privatization, the employees have started protesting against this move. Who doesn't like a nice old Government Job without the fear of being fired right? Whatever be the effect, only time will tell. What do you think about this move? Tweet to us @yourfinman.

That is it for this week's FinMail. Enjoy the day & we will see you in the next week.


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