Heightened stress could delay bank privatisation: Fitch

‘Investor interest needed for success’

The Centre’s plan to privatise two public sector banks this year could face delays on account of higher stress levels in banks’ balance sheets due to COVID-19, as well as political hurdles in effecting necessary legislative changes, Fitch Ratings said on Monday.

The government has announced an ambitious disinvestment target of ₹1.75 lakh crore for 2021-22, which includes the sale of two banks, yet to be officially identified from the dozen public sector entities in the sector.

“The bold move to privatise state-run banks faces risk from political opposition and structural challenges including heightened balance-sheet stress due to the pandemic, which is likely to keep bank performance subdued for the next 2-3 years,” Fitch said in a note.

Arguing that investors’ appetite for government-owned banks is muted due to ‘structurally weak governance frameworks’ and ‘persistently weak performance, reflected in significant asset-quality problems’, the ratings agency said that larger banks have generally ‘compromised’ financials.

‘Resistance from unions’

Investor interest might be especially muted in banks prohibited by the central bank from pursuing fresh loans and new branches under the prompt corrective action framework.

“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 investor(s) willing to acquire large stake(s) in state-owned banks and run them,” it added.

State-owned banks have been more active in extending relief and forbearance measures announced by the authorities than their private peers, Fitch noted, stressing this would make it more difficult to assess stress levels at these banks.

Work culture differences and more ‘bureaucratic’ organisational practices at public sector banks also pose a challenge.

“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, 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,” it concluded.

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