The government has been putting its might behind ensuring healthy and continued growth of PSU banks. That is the need of the hour to ensure growth momentum. However, at this juncture, it would be good to look at alternatives.
Banks are entities that continuously want capital to grow. Even the best of banks are not able to grow in a sustained manner through internal surpluses and continuously go to the market to raise money.
Since India is expected to be a fast growing nation for a long time into the future, this trend is expected to continue and as the experience of banks in the developed world shows, the need for external capital does not reduce even after a slowdown in growth.
If shareholders want to preserve their percentage holdings, they would have to continuously keep investing more money. The only way to come out of this is to sell a few entities completely.
PSU banks have a market share of close to 50 per cent in the overall bank lending. This is high. SBI and its associates account for over 20 per cent of overall lending. The size of several PSU banks is no longer meaningful, given the rapid growth of financial sector players in the country. There has been a continuous loss of overall market share.
Given the small size of smaller entities, selling of few smaller PSU banks would not change the percentage much. The value of branch franchisee is stagnating. Many private sector banks do not see the need to put up branches in the manner they did in the past. With the advent of technology, the need for branch presence has reduced. Many banking functions can now be taken care of from anywhere.
Continued ownership of retail franchisee is not expected to result in continued value addition. Soon enough, it may start to be seen as a cost that needs optimisation. The value of the banking licence has also eroded, as they are now available on tap.
In this scenario, the only case for continued ownership is that the entity is nicely positioned in the market place, has competitive advantage and is able to add value in a continuous manner over time. This is clearly not the case with several of the entities.
The government is talking of merging a few of these entities into bigger and better entities. In this process, the brand is anyways getting lost. Merging these entities would also result in branch consolidation and consequent loss of jobs over time. Would not a sale of such an entity be better both for the employees and the government?
Government finances are stressed. There is a pressure to bring down tax rates. The government needs to invest for growth. Growth requires capital.
In this scenario, it would be increasingly difficult to continuously invest money in banks. There are a large number of PSU banks. An outright sale to an entity wishing to enter the banking space in India would realise a lot of value for the government and help reduce the stress too.