The Indian government's plan to privatise two State-owned banks in the current financial year FY21-22 could face delays amid renewed challenge, like impact of coronavirus (COVID) pandemic, for the Indian banking sector, says Fitch Ratings.
The privatisation plan, which was announced in the Union Budget speech on 1 February 2021, is part of the Indian government's broader divestment goals for FY21-22, and includes privatisation of several other non-financial State-owned entities as well as listing of the wholly-owned Life Insurance Corp of India (LIC), India's largest life insurance company.
Fitch says, "We view the current privatisation plan as an extension of the government's broader agenda to reform the Indian banking sector and reduce the number of state-owned banks further, which have come down to 12 in 2020 from 27 in 2017 after three successive rounds of consolidation. Nonetheless, the bold move to privatise state-run banks faces risk from political opposition and structural challenges including heightened balance-sheet stress due to the COVID-19 pandemic, which is likely to keep bank performance subdued for the next two to three years."
The ratings agency says it believes that political support in favour of legislative changes to the Act, which are required in order to go through with the sale, could be a significant hurdle for the government. "There could also be more resistance from the trade unions this time around, who will be against the safety-net withdrawal of state ownership. Success of the plan would also require sufficient interest from investors willing to acquire large stakes in state-owned banks and run them," it added.
State-run banks in India have long been plagued with muted investor appetite due to structurally weak governance frameworks which have resulted in persistently weak performance, reflected in significant asset-quality problems.
The COVID-19 pandemic has further dampened business and consumer confidence, with the impact on reported impaired loans manifesting potentially over an extended timeframe, considering the various forbearance and relief measures by the authorities.
Given their quasi-policy mandate, Fitch says, State-run banks have played a more active role in extending these measures than the private banks, which will make it more difficult to reasonably assess stress for the State banks, thus adding to the risk of weak earnings performance for a protracted period.
State banks can also be difficult to manage, the ratings agency says, adding "They have a significantly different culture and organisational practices like being more bureaucratic, relative to private banks."
Similar challenges and the absence of meaningful investor interest resulted in the state ultimately having to sell its majority stake in IDBI Bank to LIC in 2019, which has somewhat been privatisation in letter but not in spirit.
However, Fitch says, this could change in 2021 if both government and LIC are able to divest a majority stake in the bank to an external investor, as it may be indicative of broader investor appetite in state banks with adequate loan-loss reserves.
Recent news reports suggest that the authorities are inclined to privatise a larger mid-sized and one small State-owned bank, although Fitch says it believes the government prefers to privatise larger banks to maximise divestment inflows.
"However, this will be challenging, since banks in this category - despite their wide reach and substantial franchises - have generally compromised financials, with impaired-loan ratios ranging between 9.8%-16.3% and common equity Tier I ratios between 8.8%-10.3% in nine months (9M) of FY20-21."
"Investor interest might be especially muted for banks which are currently restricted from pursuing loan growth to higher-yielding borrowers and branch expansion under the Reserve Bank of India (RBI)'s prompt corrective framework," the ratings agency says.