Former RBI Governor plans to privatise banks presents an interesting opportunity for investors
Former RBI Deputy Governor N S Vishwanathan said on Thursday that the government’s decision to privatise two state-owned lenders offered an “exciting” opportunity for investors eager to enter the market.
What is good for the country must be considered when deciding on the organisation that will be granted a licence, he said at an event hosted by industry lobby IMC Chamber of Commerce and Industry.
In response to ideas for corporate participation and worries about ownership and voting caps, Vishwanathan stated that there exist restrictions on who can start a bank that deals with people’s deposits all over the world, especially in industrialised countries.
On the issue of corporates having the capital to invest in an institution, he stated that a real economy firm will be influenced by stress in the larger economy, and we must guard against stress from other businesses seeping into a bank.
Vishwanathan stated that while the Insolvency and Bankruptcy Code (IBC) performed effectively in the beginning, issues have since surfaced about the recovery ratios, which must be “addressed.”
The remarks were made in light of the resolution of the Videocon case, in which lenders were granted only a 5% reimbursement.
According to Abizer Diwanji of consultancy firm EY, defaults are unavoidable in the banking industry, but they must be dealt with immediately rather than waiting 5-7 years.
The delay in resolving the stress can degrade value, which can be realised, he said, adding that assets producing very low-resolution percentages could fetch up to 50% if resolution attempts were undertaken sooner.
Vishwanathan stated that we must first decide whether to allow corporates before debating whether people with NBFCs should be allowed to run a bank.
According to Narendra Ostawal of Warburg Pincus, private equity firms such as his will be interested in engaging in the bank privatisation process, which he sees as a “great opportunity.”
“The main issue here is one of regulation. What is the extent of an owner’s economic ownership and governance control after the privatisation process? He believes that will be the driving force behind their success,” he remarked.
The PEs require degrees of independence in terms of governance and commensurate ownership, such as bringing in new management, he said, adding that the more splintered the ownership, the more difficult it is to generate consensus around the turnaround.
Vishwanathan stated that banks all over the world have a dispersed holding structure and that the promoter is also needed to have a certain amount of ownership.