Indian bank privatization plans could run into obstacles amid Covid: Fitch Ratings

The plan – which was announced in the Union’s budget speech on February 1, 2021 – is part of the government’s broader divestment targets for fiscal year 22, and includes the privatization of several other non-financial public entities as well as wholly owned life insurance quotation. Corporation of India (LIC), the largest life insurance company in India.

” We see the current privatization plan as an extension of the government’s broader agenda to reform India’s banking sector and further reduce the number of state-owned banks, which fell from 27 in 2017 to 12 in 2020 after three successive cycles. consolidation, ”Fitch said.

Nonetheless, the bold move to privatize state-owned banks faces a risk of political opposition and structural challenges, including increased strain on balance sheets due to the Covid-19 pandemic, which is expected to keep banking performance subdued over the course of the next two to three years.

Fitch believes that political support for the legislative changes to the law, which are necessary to complete the sale, could be a significant obstacle for the government. There may also be more resistance from the unions this time around, who will be against the removal of the safety net from state property. The success of the plan would also require sufficient interest on the part of investors wishing to acquire large stakes in public banks and to manage them.

State-owned banks in general have long been plagued by low investor appetite due to structurally weak governance frameworks that have resulted in consistently weak performance, reflected in significant asset quality issues, he said. declared.

The Covid-19 pandemic has further weakened business and consumer confidence, with the impact on reported bad loans potentially manifesting itself over an extended period, given the various forbearance and relief measures taken by authorities.

State banks have played a more active role in extending these measures (given their quasi-political mandate) than private banks, which will make it more difficult to reasonably assess stress for state banks. , thus increasing the risk of poor earnings performance for an extended period.

State-owned banks can also be difficult to manage. They have a very different (eg more bureaucratic) organizational culture and practices from those of private banks. Similar challenges and the lack of significant investor interest led the state to finally sell its majority stake in IDBI Bank to LIC in 2019, which was somewhat of a privatization in the letter but not in the spirit.

However, this could change in 2021 if the government and LIC are able to cede a controlling stake in the bank to an outside investor, as this may indicate a wider appetite of investors in state-owned banks with adequate reserves to invest in. loan losses, the rating agency said. .

Recent news reports suggest that the authorities are inclined to privatize a large midsize bank and a small state bank, although Fitch believes the government prefers to privatize large banks to maximize divestment flows. However, this will be difficult, as banks in this category – despite their broad reach and large deductibles – have generally compromised their finances, with bad loan ratios between 9.8% and 16.3% and fund ratios. own Tier I between 8.8% and 10.3%. in 9MFY21, Fitch added.

Investor interest may be particularly limited for banks which are currently constrained in continuing to grow lending to high yield borrowers and expanding branches as part of the Reserve Bank of India‘s quick fix framework, according to the report.