Indian Banking is Getting Privatised Irrespective of Govt

Regular readers would know that we have been recommending the privatisation of public sector banks for more than a few years now. There is no reason that the government has to own 21 banks (down from the earlier 27, with the merger of five associate banks and the Bhartiya Mahila Bank with the State Bank of India).

Of course, privatisation of public sector banks is not easy. Bank unions are too powerful. Many banks continue to be overstaffed with staff which is not really productive enough. Further, the current state of the balance sheets of these banks is unlikely to inspire enough confidence from any prospective buyer. There is no way a prospective buyer can be sure of whether the total amount of bad loans of any public sector bank at this point of time, are the "real" bad loans of the bank. Also, shutting down a bank is too radical a solution (even though we have showed in the past, shutting down some of the smaller banks is really not going to make much of a difference to the Indian economy).

Also, the current government is now four years into its term, and it is highly unlikely that it will go about privatising even one bank (just to see how the process works out given that no Indian government has privatised a bank before).

As French economist Jean Tirole writes in Economics for the Common Good: "In case of politicians, the incentives are strongly influenced by the need to be elected or reelected." With the next Lok Sabha elections scheduled in 2019, it is highly unlikely that the government will think of privatising these banks and take on the ire of the bank unions and opposition parties.

As the finance minister Arun Jaitley recently said: ""This (privatisation) involves a large political consensus. Also, that involves an amendment to the law (Banking Regulation Act). My impression is that Indian political opinion may not find favour with this idea itself."

Nevertheless, the thing is that it doesn't matter. The market is doing its work and the Indian banking sector is getting privatised irrespective of the government continuing to own 21 public sector banks. Take a look at Table 1 which basically gives the details regarding the total loans or advances given by public sector banks and private sector banks over the years.

Table 1: Total advances (in Rs crore)

What does Table 1 tell us? The ratio of total loans given out by private sector banks to that given by public sector banks has been increasing since 2012. As on March 31, 2012, the ratio of total loans given by private sector banks to those given by public sector banks had stood at around 25%. By March 31, 2017, this had jumped to around 40%.

What does this mean? It basically means that private sector banks have been increasing the pace of their loan disbursal at a much faster rate than their public sector counterparts. Take a look at Table 2, which basically gives the details of the total amount of loans or advances given by public sector banks and private sector banks, year on year.

Table 2:

What does Table 2 tell us? It tells us that over the last few years, the private sector banks have distributed more loans than public sector banks. In 2016-2017, the overall loans of public sector banks actually contracted, whereas the private sector banks distributed loans worth Rs 2,80,223.6 crore during the course of the year. In 2015-2016, the private sector banks lent much more money than public sector banks. The private sector banks lent around Rs 3,55,028 crore, whereas the public sector banks lent around Rs 1,17,327 crore. So, public sector banks lent just one third of the loans that private sector banks did, during the course of 2015-2016.

What Tables 1 and 2 show us very clearly is that the Indian banking sector is being taken over by private banks despite no privatisation of the public sector banks.

This is further ascertained by the following two tables. Table 3 basically gives details of total assets of public sector banks and private sector banks over the years.

Table 3: Total assets (in Rs crore)

Table 3 shows that the total assets of private sector banks have been gradually increasing over the years with respect to the total assets of public sector banks. In 2009, the ratio was at around 27%. By 2017, this had jumped to 36.8%.

Let's take a look at Table 4, which gives us details of the increase in assets of public sector banks and private sector banks, year on year.

Table 4:

Table 4 clearly shows that the ratio of the increase in assets of private sector banks to the increase in assets of public sector banks, has been growing over the years. It peaked at 109% in 2015-2016, from where it fell to around 75.5% in 2016-2017, primarily because of demonetisation.

A lot money which was with the public came into banks as deposits, in the aftermath of demonetisation. These deposits were in turn invested in government securities leading to an increase in investments and assets of public sector banks.

Now take a look at Table 5, which has the net profit of the public sector banks and the private sector banks, along with the return on assets.

Table 5:

Table 5 clearly tells us that private sector banks have been more profitable over the last few years. The return on assets in case of private sector banks is also significantly better compared to their public sector counterparts, though it has taken a beating over the past few years.

To conclude, private banks are rapidly capturing market share in the Indian banking space, as public sector banks go slow on lending due to a massive amount of accumulated bad loans.

As of December 31, 2017, the total bad loans of public sector banks stood at Rs 7,77,280 crore, which is about 86.40 per cent of the total bad loans of scheduled commercial banks in India.

A massive amount of value has been destroyed and with private banks taking over the space being vacated by public sector banks, this value continues to be destroyed.

And there is nothing much that the government as the owner of public sector banks can do about it, other than throwing more money at the problem. There are no straightforward solutions to this problem. It's a mess which will get messier.India's banking sector will continue to get privatised irrespective of whether the government wants it or not.

source from vivek kaul dairy