MUMBAI: The Reserve Bank of India’s decision to keep businesses away from banking licenses will help the government avoid allegations that it is selling banks to large corporations. However, the number of potential buyers for public sector banks (PSBs) will decrease.
In the absence of any deep-pocketed corporate house, bidders for PSU banks would have to be either private or multinational banks, or private equity investors who would be able to find a few billion dollars to buy a bank. . The challenge for private equity investors is that they would look for an exit after a few years, as multinational banks increasingly reduce their exposure to individuals as retail banking becomes a national business due to the costs. of compliance.
Private players like HDFC Bank, Kotak, ICICI and Axis have the capacity to raise funds, but pension commitments would be a deterrent. In March of this year, Finance Minister Nirmala Sitharaman said that the salaries and pensions of bank workers would be protected in the event of privatization. “The deal breaker would be the pension liabilities of these banks,” said a private banker. The fact that the pension is indexed to inflation makes things worse for any buyer.

The source added that this is the reason why banks are trading at low valuations despite cleaning up their loan portfolios.
For private banks, a banking license or branch network has the same appeal as it would for a corporate house. All the more so given the disruption that digital technology causes. “Unlike in the past where a national banking license attracted a lot of interest, there was only one serious bidder for Lakshmi Vilas Bank – DBS. When the RBI was looking for someone to take over PMC Bank, despite the lure of “A license from a Mumbai-based bank, there was still only one bidder,” said a banker.
While PSOs are in a better financial position, a buyer would have to invest more capital and likely see an increase in the cost of funds, as government ownership, which provides a cushion for depositors, will no longer be there. Since liberalization, the central bank has chosen the safe route by issuing banking licenses to financial institutions. The first set of banks that got their license were widely sponsored by financial institutions including HDFC, ICICI, UTI, IDBI and some non-bank financial companies such as Centurion, Kotak Mahindra and Bandhan. The experience in licensing professionals has not been good (Global Trust Bank and Yes Bank). The absence of private non-bank financial institutions makes divestment more difficult.

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