(This story originally appeared in on Nov 27, 2021)

The Reserve Bank of India’s decision to keep corporates away from bank licences will help the government sidestep allegations that it is selling banks to big business. However, the number of prospective buyers for public sector banks (PSBs) will shrink.

In the absence of any deep-pocketed corporate house, the bidders for PSU banks would have to be either private or multinational banks, or private equity investors who would be in a position to come up with a couple of billion dollars to buy a bank. The challenge in the case of private equity investors is that they would look for an exit after a few years, while multinational banks are increasingly reducing their retail exposure as retail banking is becoming a domestic activity because of compliance costs.

Private players like HDFC Bank, Kotak, ICICI and Axis have the equity-raising capacity, but the pension liabilities would be a deterrent. In March this year, finance minister Nirmala Sitharaman had said that the salary and pension of bank employees will be protected in the case of privatisation. “The deal-breaker would be the pension liabilities of these banks,” said a private banker. The fact that the pension is inflation-linked makes it worse for any buyer.

The source added that this is the reason why the banks are trading at low valuations despite having cleaned up their loan books.

For private banks, a bank licence or a branch network does have the same appeal that it would have for a corporate house. More so given the disruption that digital is causing. “Unlike in the past when a domestic bank licence would draw a lot of interest, there was only one serious bidder for

— DBS. When the RBI was looking for someone to take over PMC Bank, despite the lure of a licence of a Mumbai-headquartered bank, there was again only one bidder,” pointed out a banker.

While the PSBs are in better financial shape, a buyer would need to put in more capital and probably see a hike in the cost of funds as the government ownership, which provides a cushion to depositors, will no longer be there. Since liberalisation, the central bank has taken the safe route of issuing bank licences to financial institutions. The first round of banks that got their licence was largely sponsored by financial institutions, including HDFC, ICICI, UTI, IDBI and some non-banking finance companies such as Centurion, Kotak Mahindra and Bandhan. The experience in granting licences to professionals has not been good (Global Trust Bank and Yes Bank). The absence of private non-bank financial institutions makes the divestment more challenging.