Global rating agency Fitch said on Monday that India’s plan to privatise two public-sector banks (PSBs) in FY22 could be delayed, as the “bold move” faces risk from political opposition and structural challenges, including heightened balance-sheet stress in the wake of the Covid-19 outbreak. The pandemic is likely to keep banks’ performance subdued for the next two to three years, it added.
The plan, announced in the Budget in February, is part of the government’s broader divestment goals for FY22, and includes privatisation of several other non-financial state-owned entities as well as listing of insurance behemoth LIC. The government has set its overall disinvestment target for FY22 at Rs 1.75 lakh crore, about three-and-a-half of times the actual realisation last fiscal.
“Fitch 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,” it said in a statement. Success of the privatisation move would also require sufficient interest from investors willing to acquire large stakes in PSBs and run them, it added.
Anticipating risks to the privatisation move, Fitch, however, acknowledged the plan as an extension of the government’s broader agenda to reform the banking sector and reduce the number of PSBs further, which have come down from 27 in 2017 to 12 in 2020 after three successive rounds of consolidation.
Contrary to recent media reports that the authorities are inclined to privatise a larger mid-sized and one small state-owned bank, Fitch 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% and 16.3% and common equity Tier I ratios between 8.8% and 10.3% in (nine months of FY21),” it said. Investor interest might be especially muted for banks which are currently under the Reserve Bank of India’s prompt corrective framework and restricted from pursuing loan growth to higher-yielding borrowers and branch expansion.