Dear New PM in 2019, Privatise PSBs to Ignite Economic Boom

Video Editor: Mohd Ibrahim

Two hundred weeks into the Narendra Modi government, and we must admit, with great regret, that it has blown the fortuitous opportunity it got to repair India’s crisis-ridden public-sector banks (PSB).

He got a single party majority in the Lok Sabha after three decades of relatively weak coalitions AND oil dropped to under $30 per barrel, giving him a surplus of nearly Rs 1 lakh crore – or one percent of the GDP – every year. But four years out, PSBs have keeled over and are dying (already dead, some would say).

• PSBs’ share of total market capitalisation of Indian banks has crashed: 43 percent (2014) to 26 percent (2018)
• While private banks doubled their value, adding over $100 billion in these four years, PSBs wiped out nearly $50 billion from their already emasculated valuations, despite $10 billion of equity infused by the government, with a promise of another $35 billion over the next two years
• PSBs’ share in deposits is down by nearly four percentage points (from 80 percent to 76 percent), but their portion of outstanding loans has fallen by twice, ie, by eight percentage points (from 79 percent to 71 percent). So profitability is in a deathly downward spiral

The so-called “bold move” to issue bank recap bonds is equal to using Band-Aid to cure cancer: it’s a sleight of hand that converts a bank’s liabilities into assets, but hides the contingent liability, that actually increases the government’s fiscal deficit “invisibly,” off the balance sheet.

So, is it possible to construct a politically feasible plan to begin privatising PSBs? Yes, provided you are NOT seen to be selling the family silver to “crony capitalists,” NOT throwing away government equity at today’s distressed values, NOT working against the interests of the bank’s workforce.

Here’s a typical case study to show how to “Do the Impossible”:

• Pick a small public-sector bank, say with a distressed market capitalisation of Rs 25,000 crore
  
• Assume that the state owns 60 percent of this bank; now reclassify its capital structure to convert the government’s equity shares into10-year Compulsorily Convertible Preference Shares (CCPS), which are separately listed; remember that CCPS are equal to “equity” under Indian accounting standards, so the government’s ownership shall stay fully intact, but it will lose its voting rights, thereby allowing a new owner to come in without the government crimping his management
• Transfer 9 percent of CCPS into an employee stock pool, liberally granting options to the workforce
• Allow only individuals/professional Indian bankers with stellar track records, either singly or in groups, to bid for a 10 percent “management stake” in the asset
• Even if the winning bid were to be at twice the distressed value, even then a 10 percent management stake would cost an easily raise-able (from credible PEs) Rs 2,000 crore. But why only Rs 2,000 crore? Because at the doubled market cap of Rs 50,000 crore, 60 percent would have been converted into CCPS

Bingo! The privatisation is done. No charge of crony capitalism. No government sale at today’s throwaway price; in fact, if the asset was to multiply 10 times in 10 years, the government’s 51 percent CCPS stake would be worth Rs 1.25 lakh crore (up from the Rs 15,000 crore of current/distressed valuation)! And the ESOP holders, ie, the bank’s employees, would see their 9 percent stake go up to Rs 25,000 crore in value.

So, “Mr/Ms New PM in 2019, please ignore bureaucratic naysayers and give this a shot, it’s doable.” And once this one is successful, others will jump on to the bandwagon, and India would have solved its most intractable economic problem with full political endorsement. So keep the faith!

(Read the full text story here)