Thursday, November 17, 2011

Publicsector banks carry the load, private sector banks stay safe in India

The report in today's newspapers that the market cap of 14 private sector banks was better than that of 24 nationalised banks reflects market ironies which cannot be ignored. Public sector banks (PSBs) had 74.6 per cent of bank deposits while the private ones had only 18 per cent. On the face of it, this tells a rational story of its own. That banks with smaller operational scales are much better placed in the market and inspire greater confidence than the relatively larger banks in the public sector. Perhaps, the comparison between the two segments is even unfair and it should not perhaps be made at all. Each segment is doing its own job, and doing it as well. But the hitch arises when experts says that the non-performing assets of the PSBs are greater because the government's 51 per cent ownership, and giving the indirect hint that there is need to disinvest in the PSBs. It leads one to conclude that there would be more infusion of capital into the PSBs if they move out of the government sphere and into the open market. This is an untested proposition at best. The limited market share of private banks in terms of deposits is a clear indication that people as yet do not have confidence in the private sector banks, to say the least. Private banks in the country have not yet shown that they have evolved better corporate practices than the PSBs. No one has yet scrutinised the private banks as to establish their credentials. And more to the point, there should be some sort of stress test for the private banks and it is quite possible that these banks might show too many vulnerabilities.
This fact of market cap differences between the public and private banks should be read with the fact that the chief information commissioner Jatin Gandhi has asked the Reserve Bank of India to place on its website all the top private sector defaulters of the public sector banks. This would expose the known fact that India's private sector turns to the PSBs for massive loans and they even default in their loan repayments. There is the glaring fact that the biggest lender to the Kingfisher airlines, which is on the brink of collapse, is the State Bank of India, which along with other banks has a 23 per cent stake in the failing airlines.
If the market fundamentalists -- basically idiots -- think that privatising PSBs is the way forward, then they are indeed living in a fool's paradise. This does not mean that the PSBs should move into the market and operate more efficiently, and that the private sector banks must stop pretending to be posh and efficient and be really posh and efficient.

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