Indian Banks: Privatisation is the only way out!

10 Dec 13 Indian Banks: Privatisation is the only way out!

For several years now, there has been a clear divergence in performance between the “new” private sector banks and their state owned counterparts. Though this divergence was already visible pre-2008; post crisis, the difference has become stark, across a number of parameters:

Public sector banks “New” private banks
Real growth barely below industry average Growing at 20% p.a.+
Worsening NPAs, more and more “restructuring” of loans – especially large projects Some NPA pressure, but not as exposed to large projects
Capital adequacy worries, especially if NPAs rise further Comfortable capital ratios
Costs rising due to inflexible labour force and slower adoption of technology Aggressive adoption of technology lowering transaction costs
Dismal valuations Premium valuations
Unable to raise capital as government is broke and reluctant to dilute holdings Can raise money when they need it

As I’ve mentioned, this is nothing new – and investors have preferred well-run private banks for over a decade – as can be seen in their sustained high valuations. However, what caught the eye was a recent interview in the Mint, of Pratip Chaudhari, about-to-retire Chairman of State Bank of India (SBI). He was asked about this divergence of performance, and his answer essentially was that the owners (government) are pushing top-line rather than profit or market cap. This drives managers to take on loans in a “mindless manner”.

While many of us are critical of the public sector, this kind of statement from the Chairman of SBI is startling!

No company can be run with only a top-line goal, and especially not banks! The systemic risk is huge.

But while the RBI can bully other bank owners/managers, it can do little (apparently) to the Government of India. And that’s where the root of the problem lies! The owner of PSU banks is the government, which does not behave like a normal shareholder – but instead is subject to political whims and fancies. In the process, minority shareholder value is being destroyed, large (and rich) defaulters are being bailed out by taxpayer money, SMEs are starved of capital and we’re close to making our banking sector sick.

… and yet, nobody dares utter the magic word – privatisation! Analysts, media, industry lobbies and in fact, everybody seems to have accepted that this is simply not possible. But ultimately, this is the only way out, and the sooner all of us (including the RBI) realize this, the better! The RBI already has restrictions on individual holdings, and there’s no reason why banks cannot function as autonomous, board-governed entities. The journey of ICICI Bank also provides a perfect template – and investors will be delighted to own some of these banks – as long as they’re not run by our government!

Arun Jethmalani
Arun Jethmalani

Arun is one of the founders of ValueNotes. Apart from trying to build a high-quality research business, he has spent the last 27 years researching, analyzing, and dissecting companies and industries. He has worked with clients of all shapes and sizes, from all parts of the world – in providing them insights that make a difference to their business.
Prior to ValueNotes, he was an equity analyst/advisor, and wrote extensively on investing – including a column titled “Value for Money” which ran for 10 years in the Sunday edition of the Economic Times. To this day, he remains an avid “value” investor.
He has also been published in several other publications, and is a regular speaker at events related to technology, investing, competitive intelligence, business process management, Internet, etc. See: Valuenotes Events
He has been instrumental in developing a community of research and intelligence professionals in India, and is the founder and current chairman of the SCIP (India) Chapter. Arun holds a B Tech from IIT, Bombay and an MS from Duke University, NC, USA. LinkedIn Profile

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