Global rating agency Fitch said on Monday that the Centre’s decision to privatise public sector banks (PSBs), face risks from political opposition as well as structural challenges like heightened balance sheet stress due to the ongoing Coronavirus pandemic.
In its commentary titled “India’s Bank Privatisation Plans Could Face Hurdles Amid Covid” the agency said that the infection induced situation is likely to subdue the performance of the banking sector for at least two to three years.
Lack of 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, it has stated.
Moreover, 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 investors willing to acquire large stakes in state-owned banks and run them, the Fitch statement said.
The privatisation plan was announced in the Union budget for 2021-22 as is part of the government’s broader divestment goals for FY22. It includes privatisation of several other non-financial state-owned entities and listing of the wholly-owned Life Insurance Corporation of India (LIC).
The current privatisation plan is as an extension of the government’s broader agenda to reform the Indian banking sector and reduce the number of state-owned banks further. The number of PSBs came down from 27 in 2017 to 12 in 2020 after three successive rounds of consolidation, it added.
State banks in general have long been plagued with muted investor appetite due to structurally weak governance frameworks which have resulted in persistently weak performance, reflected in significant asset-quality problems, it added.
Fitch said the Covid-19 pandemic has further dampened business and consumer confidence. It is the impact on reported impaired loans will manifest potentially over an extended timeframe, considering the various forbearance and relief measures by the authorities.