Ever since Indian prime minister Narendra Modi announced the privatization of two state-owned banks in his budget speech in February, the Indian banking community has been engaged in a diverting game: guess the banks.
India has 12 state-owned lenders, which stem from Indira Gandhi’s nationalization of 14 in 1969 and another six in 1980, and they are varied in size and health.
State Bank of India is the biggest and by almost any metric the most successful – and, Modi has said, is systemically important and not up for sale in this new initiative. The others are a mixed bag tending mainly towards weakness.
So, which should the two banks be? Big ones? Small ones? Bad ones? Slightly better ones?
A backdrop to the debate was the consolidation among many state-owned lenders that took place in 2020.
As part of that process, Oriental Bank of Commerce and United Bank of India were merged into Punjab National Bank; Syndicate Bank merged with Canara Bank; Andhra Bank and Corporation Bank were merged with Union Bank of India; and Allahabad Bank merged with Indian Bank. These followed the merger of Bank of Baroda, Dena Bank and Vijaya Bank the previous year.
In fact, there are only six state-owned banks that haven’t been part of consolidation in the past couple of years: Bank of India, Bank of Maharashtra, Punjab & Sind Bank, Central Bank of India, Indian Overseas Bank and UCO Bank. At one stage there were 27 state banks.
In truth, it doesn’t make a huge difference which the government decides to go for
Some felt that the merged banks should be put on the block: they are bigger, their scale makes them more likely to survive in a cut-throat environment in which private banks such as HDFC and ICICI are manifestly better, and they therefore might attract a meaningful amount of money to state coffers.
Others felt that those banks were not yet in a position to be sold, since they are in varying states of advancement in bedding in these difficult and often debt-laden mergers. Therefore, the other six, cleaner and easier to understand, should be sold.
Last week we got our answer, if not the final answer: a shortlist of four banks has been decided upon, and they are in the latter camp: small to mid-sized banks not part of the consolidation drive. The four are Bank of Maharashtra, Bank of India, Indian Overseas Bank and the Central Bank of India – which, to be clear, isn’t a central bank in the widely used sense of the word: that, of course, is the Reserve Bank of India (RBI).
Two of those will be chosen, but in truth it doesn’t make a huge difference which the government decides to go for. The headcount of the banks varies from 13,000 (Maharashtra) to about 50,000 (Bank of India); market cap varies from $1.57 billion (Central Bank of India) to $3.7 billion (Bank of India); they all have double-digit levels of gross non-performing loans (13.8% at Bank of India, 16.8% at Bank of Maharashtra, 13% at Indonesian Overseas Bank, 19.9% at Central Bank of India). None is exactly the heart and soul of dynamic Indian banking.
DBS clue
Which brings us to our next question. Who would buy them? Perhaps there are institutions that dream of buying inefficient, debt-hit and small operations in a market filled with true leaders who really know what they’re doing. But if so, it’s not clear why.
Perhaps the purchase of Lakshmi Vilas Bank by DBS last year gives us a clue. DBS merged the bank into its existing digital bank, and in so doing gained two million retail customers and a branch network.
So, there are people out there who are prepared to put the work in to turn a trouble bank around.
But that only tells us so much. LVB was in such bad shape that DBS effectively got it for free, just a S$153 million goodwill hit, and was allowed to fold it into its existing subsidiary by the RBI, which would never normally be the case.
A privatization programme assumes the government actually wants to make some money out of its sales. Let’s see if anyone is willing to offer it.
