Nationalizing Losses, Privatizing Profits: The Logic Behind Bank Privatization

India’s Finance Minister, while presenting the Union Budget in February 2021, had announced the privatization of Public Sector Banks (PSB) as part of the disinvestment drive to garner Rs 1.75 lakh crore. The Banking Laws (Amendment) Bill, 2021, which the government will soon introduce, is aimed at facilitating this process. This amendment seeks to bring down the minimum government holding in the PSBs from 51% to 26%.

This privatization process has been in place for a while. Earlier, the parliament had passed a bill to allow the privatization of state-run general insurance companies. The General Insurance Business (Nationalization) Amendment Bill, 2021, removed the requirement of the Central Government to hold at least 51% of the equity capital in a specified insurer. Government think-tank NITI Aayog has already suggested to the Core Group of Secretaries on Disinvestment that two banks – Central Bank Of India and Indian Overseas Bank – and one insurance company, should be treated as prime candidates for privatization.

The decision to disinvest PSBs is most unfortunate, firstly because PSBs have been steadily making profits. The net profit of PSBs surged to Rs. 14,012 crores in the first quarter of 2021 and further rose to Rs. 17,132 crores in the second quarter of last year.  The combined profit (Rs. 31,114 crores) of the first half of the current fiscal is close to the profit earned (Rs 31,820 crore) in the entire previous financial year (2020-21).  This is the highest profit made by PSBs in the last five financial years.

Despite these statistics, the government’s moves towards privatization have been strongly supported by a range of policymakers, and advisors. Notably, Dr. Krishnamurthy Subramanian, India’s Chief Economic Adviser till October 2021, while presenting the pre-budget Economic Survey in 2020, had told the parliament, “If the government invests Re. 1 in the Public Sector Banks (PSB), the government loses 23 paise, but if the same amount is invested in private banks, the Government gains 9.6 paise.”  Such official propaganda against PSBs has helped to create a climate of opinion in favour of bank privatization.

The recent fall of the Yes Bank – a private bank – gives a lie to the pro-privatization claims. After the great fall of Yes Bank, the government asked the State Bank of India (SBI), the biggest PSB, to rescue Yes Bank from this catastrophe. The value of Yes Bank’s every share during the collapse came down to Rs. 2 only.  But SBI bought every share at Rs. 10 and in total it purchased 255 crore shares. This was 49% of the total shares of Yes Bank. SBI invested Rs. 2,450 crores to salvage the sinking ship of Yes Bank. SBI wasn’t alone in this; a consortium of public sector banks and companies, including Life Insurance Corporation (LIC), were pressed into action to save this bank from perpetual bankruptcy.

This is a perfect instance of nationalizing the losses and privatizing profits. The same logic lay at the heart of bank privatization. Governmental practices of crony capitalism have dried up the PSBs. Despite that they continue to make profit. Yet the government chooses to privatize them. It shows the great disregard of the government for public assets and its subservience to corporate capital.

Talking of crony capitalism, a few days ago the union government informed the apex court that the Enforcement Directorate had confiscated Rs 18,000 crores in money laundering cases from Vijay Mallya, Nirav Modi and Mehul Choksi and returned it to the banks. That is a small percentage of the total amount reported against these figures in money laundering cases – approximately 67,000 crores, as reported by the union government to the Supreme Court. The government also informed the Supreme Court that 4,700 cases for the alleged offense of money laundering are being investigated by the ED. In all these cases taken together, only 313 people have been arrested since the enactment of the Prevention of Money Laundering Act (PMLA) in 2002.

Observing this lackadaisical attitude in the entire investigation process, the apex court stressed on the need to hasten the investigation process, because “cash travels faster than light”. Together with the staggering amount of Non-Performing Assets, these money laundering cases have bled the PSBs dry, and the Central Government is singularly responsible for pushing the PSBs into positions of difficulty.

Generally, privatization has been adopted to sell banks that are in trouble. The present policy is however different. The Industrial Development Bank of India (IDBI), whose government shares look likely to be sold soon, has seen its stock appreciate by 44.2% in the last one year through improved financials and provisioning of bad loans. It turned profitable in FY 2021 after five consecutive years of loss. For the moment, the government is open to selling its entire 94.71% stake in the bank, which includes LIC’s 49.24% equity stake, which comes with management control. The union government holds another 45.48%. The non-promoter shareholding in the bank currently stands at only 5.29%. The union government, in this case, is adopting a tactic of diluting its shares instead of resorting to direct privatization.

Interestingly, the de-facto privatization of IDBI would not violate the existing laws.   But in the case of IDBI, its privatization would not violate this law because, though it is still a bank with majority government ownership, for historical reasons it is no longer an entity requiring parliamentary approval for transfer of ownership to the private sector. The original IDBI was established in 1964, as a development bank which was fundamentally different from commercial banks, whether public or private. It was a fully owned subsidiary of the central bank, and it was not a typical deposit taking institution.

With financial liberalization, the financial policy started changing and the distinction between development banking and commercial banking gradually got blurred and abolished eventually. The parliament passed the Industrial Development Bank (Transfer of Undertaking & Repeal) Act in 2003, by which it allowed the transfer of the erstwhile IDBI to a new government company, IDBI Ltd., established under the Companies Act.

Further, in 2005, IDBI Bank Ltd, established as a subsidiary of IDBI Ltd. to undertake commercial banking activities, was merged with IDBI Ltd., under the voluntary amalgamation provisions of the Banking Regulation Act. Finally, in 2008, the name of the company was changed from IDBI Ltd. to IDBI Bank Ltd. to reflect its changed functions. IDBI Bank Ltd. is now a company in which the government has the right to reduce its stake without parliamentary approval, but such moves are subject to the Reserve Bank of India (RBI) provisions with regard to bank ownership and control.

Thus, the choice of IDBI Bank Ltd. as the target for privatization is explained by its special status given its unusual history that frees the government from the need for parliamentary approval at this stage. The stage is therefore set for selling IDBI, and disinvestment of the LIC is complete. The developments surrounding IDBI shows how shrewdly the government is proceeding in the mad rush to privatize PSBs. Only a powerful peoples’ struggle can stop the government in its tracks. ν