India’s banks: time to privatise? – Industry roundup: 26 July
by Graham Buck
Debate heats up on privatising India’s banks
Over half a century since then prime minister Indira Gandhi nationalised 14 of India’s public sector banks – accounting for over 80% of the country’s bank deposits – debate on whether they should return to the private sector has been fuelled by a recently published policy paper.
“Privatisation of Public Sector Banks in India: Why, How and How Far?” is authored by economists Arvind Panagariya, former vice-chairman of government think tank NITI Aayog and National Council of Applied Economic Research director general Poonam Gupta, who note that “since 2014-15, almost the entire growth of the [Indian] banking sector is attributable to the private banks and the largest public sector bank (PSB), State Bank of India (SBI)”.
In their analysis Panagariya and Gupta make the case for a major drive to privatise India’s PSBs. The government subsequently nationalised a further six banks in 1980, but currently the total stands at 12 although SBI stands out in terms of its size, importance and operational quality. The policy paper suggests that SBI remains in the public sector but recommends that the remaining 11 banks be privatised completely.
The paper also acknowledges that nationalisation of India’s banks goes back further than 1969. The Reserve Bank of India (RBI) was nationalised shortly after India’s independence in 1947, while the SBI came into being after the government took over the Imperial Bank of India in 1955. Supporters of nationalisation argued that the banking system did not serve the large economically underprivileged section of Indian society.
“The subsequent record has been mixed, at best, and economic reform has included gradually making room for private sector banks, while trying to strengthen PSBs through structural reforms,” notes a recent report on the policy paper’s findings.
“The case for privatisation is based on the relative record of public sector and private sector banks over recent decades. While there has been considerable variation in the quality of performance within each category, on average, private sector banks perform much better than their PSB counterparts. Greater efficiency through privatisation can improve the allocation of financial resources within the economy, promote growth in the financial sector, and support higher overall growth of the economy.”
Panagariya and Gupta suggest that privatisation should involve complete government divestment, to avoid any shadow of future discretionary interference. They are relatively agnostic on the exact process, including the possibility of dispersed ownership as well as large strategic buyers and argue that non-financial corporates should be allowed to buy banks. They note that technological innovation is already opening up banking and bank-like services to a range of non-financial companies, including various tech firms.
The paper acknowledges that bank privatisation will not be easy, but the timing is right as India’s economy needs a more efficient financial sector to grow at rates that will generate employment. However, there are strong political obstacles, as the PSBs are already major employers. Bank unions have expressed opposition, and the government has already postponed parliamentary debate on the legislative changes that would be needed to allow privatisation to begin. An easier route would be simply to expand the banking sector by issuing new licences for private sector banks, but critics claim this would prolong the pain and increase the costs of having an inefficient banking sector.
In June 2022, the RBI’s latest Financial Stability Report admitted the poor financial health of PSBs. “In the severe stress scenario, however, the Gross Non-Performing Assets (GNPA) ratios of PSBs may increase from 7.6% in March 2022 to 10.5% a year later whereas it would go up from 3.7% to 5.7% for Private Sector Banks (PVBs),” the RBI report said.
The government of Narendra Modi appears to agree and in recent years has taken the first steps towards privatisation and mergers in the banking sector. In 2016, then finance minister Arun Jaitley proposed the merger of five associate banks of SBI. In 2019, state-owned Bank of Baroda became India’s third-largest lender after a merger with Vijaya Bank and Dena Bank.
Jaitley’s successor Nirmala Sitharaman took the merger policy a step further. In one of the Modi government’s biggest reforms, Sitharaman in August 2019 announced 10 PSBs would merge into four bigger entities. She also announced the infusion of over Rs 55,000 crore in the PSBs.
While the government announced in its 2021-22 Union Budget the privatisation of two PSBs, last December Sitharaman said that the decision was pending. More recent reports suggests that the government plans to initiate the next round of PSB mergers, with the aim of creating four or five large banks of the scale of SBI.
Currency defence drains Hong Kong’s interbank liquidity
A measure of Hong Kong’s interbank liquidity has halved in the past two months reports Bloomberg, with analysts forecasting more cash drainage as the city’s de-facto central bank defends its currency.
The Hong Kong Monetary Authority (HKMA) has bought a total HK$172 billion (US$22 billion) of local currency since 11 May, shrinking the aggregate balance to about HK$165 billion. That has pushed up local interest rates, helping narrow the gap with the US to help the HKMA maintain its dollar peg.
The intervention has come at the cost of draining the city’s liquidity, with hedge fund Hayman Capital Management’s founder and principal Kyle Bass claiming it may be depleted by the end of next month. The comment prompted the monetary authority to vehemently defend its currency policy last week. However, the Hong Kong dollar faces renewed weakening pressure imminently, with the Federal Reserve forecast to raise its key interest rate by another 75 basis points on 27 July.
The HKMA's liquidity withdrawals have pushed the one-month Hong Kong interbank offered rate (Hibor) up by 32 basis points this month to 1.19%, the highest level since April 2020. That has helped narrow the spread with the London interbank offered rate of the same tenor, but the gap between the two remains over 100 basis points, making it attractive for traders to short the local currency versus the US dollar.
“It appears that the aggregate balance will fall to below HK$100 billion after the Fed meeting in September,” said Ken Cheung, chief Asian foreign-exchange strategist at Mizuho Bank in Hong Kong. Hibor will catch up with its US equivalent at year-end, he predicted.
Asia central banks cooperate for QR code interoperability
The central banks of Indonesia, Malaysia, the Philippines, Singapore and Thailand are to develop an interoperable cross-border payments system that will enable residents of each country to use their mobile banking app to make quick response (QR) code-based payments for goods and services when visiting any of the other four territories.
The integrated system will enable visitors to another of the participating countries to make transactions in local currency that will then be settled in their own without having to be exchanged via an intermediary currency such as the US dollar.
Bank Indonesia, Bank Negara Malaysia, Bangko Sentral ng Pilipinas, the Monetary Authority of Singapore (MAS) and the Bank of Thailand announced that they were preparing to sign a general agreement on payment connectivity that will establish a framework for the system later this year at a seminar during a meeting of G20 finance ministers and central governors in Bali.
“Several countries in the ASEAN region are implementing bilateral cooperation for payment services using QR code and fast payments based on local currency settlement (LCS),” said Bank Indonesia.
“Moving forward, Bank Indonesia acknowledges an opportunity to expand existing bilateral cooperation for payment connectivity in ASEAN multilaterally as part of the efforts to strengthen economic integration in the region.
“Collaboration is the key for the initiatives to accelerate economic recovery and financial integration for the benefit of the community, especially MSMEs, migrant workers and tourists, inclusively.”
"It’s a public good infrastructure which improves financial inclusion, enhances efficiency and creates new business opportunities for all citizens” said MAS Managing Director, Ravi Menon.
Bank Negara Malaysia and the Bank of Thailand have already rolled out real-time cross-border QR payments their two countries in June 2021.
Ripple partners with Singapore’s FOMO Pay
Enterprise blockchain developer Ripple is partnering with the Singapore-based payments institution FOMO Pay, which will utilise Ripple’s crypto-enabled enterprise technology to improve its cross-border treasury flows.
On-Demand Liquidity (ODL) leverages XRP, the digital asset built for payments as a bridge between two fiat currencies, enabling instant and low-cost settlement without the need to hold pre-funded capital in a destination market.
Historically, ODL has been primarily utilised for cross-border payments to help payment services providers (PSPs) and small-to-medium enterprises (SMEs) manage trapped capital that could be better deployed to help grow and scale their businesses.
However, traditional treasury payments are subject to the same pain points and friction as cross-border payments due to the archaic infrastructure that correspondent banking relies on. The partners note that an estimated US$3.5 billion is spent annually to address issues associated with treasury and liquidity.
“By leveraging ODL for treasury payments, FOMO Pay is able to get 24/7, year-round access to liquidity for EUR and USD, thereby enabling same-day settlement globally,” stated a release. “ODL for treasury payments makes it easy for PSPs like FOMO Pay to improve internal business cash flows, thereby allowing them to reduce business costs and improve operations. Prior to using ODL, FOMO Pay’s treasury managers had to use other modes of payment in EUR and USD where funds would take one to two days to reach destination accounts.”
In separate news QNB Group, the biggest bank in Qatar and the largest financial institution in the Middle East, is joining RippleNet to tap its increasingly popular blockchain solution for cross-border payments and settlement.
QNB has adopted the RippleNet technology to roll out a direct remittance service for money transfers from Qatar to the Philippines, according to an announcement from the Ripple team. The move also involves China Bank, one of the top private universal banks in the Philippines, to establish a connection and offer this service.
Qatar National Bank (QNB) is the most valuable banking brand in the MEA region with a value worth US$7.0 billion, ranking at 45th in the top 50 global banking brands worldwide.
Commerzbank, Deutsche Telekom offer digital industry solutions
Germany’s Commerzbank and Deutsche Telekom are cooperating in the industrial sector with the joint development of fully automated supply chains with integrated financial services.
Deutsche Telekom subsidiary T-Systems and the bank are focusing on digital technologies such as 5G, artificial intelligence, the internet of things (IoT), blockchain, cloud technology and sensor technology.
The partners say that digital supply chains reduce costs and ensure transparency. “The current geopolitical and economic situation has revealed the weakness of supply chains,” they add. “Many supply paths are complex, static, lacking in transparency and involve numerous manual stages. They are designed to function when all the framework conditions remain constant and predictable.
“Error-proneness is high, as in the majority of cases physical and financial supply chains are not linked to one another digitally.”
The benefits to corporate clients profit from the digital combination of physical and financial supply chains include: more efficient, transparent and more resilient supply paths; intelligent warehouse management; improved access to liquidity; integrated automated financial services; and cost reductions
"Supply chains will change rapidly with digital networking and integrated payments," said Jörg Oliveri del Castillo-Schulz, Chief Operating Officer of Commerzbank. "Together with T-Systems we are working on scalable solutions so that our customers can make their complex supply chains such that these are more efficient, resilient and productive."
Commerzbank will also be supported with scientific expertise in the framework of its cooperation with the Fraunhofer Institute for Material Flow and Logistics (IML) in Dortmund.
Japan Post’s debut corporate bond “will be green”
Japan Post Holdings, which manages its group companies engaged in postal, banking, and insurance businesses, plans to launch a yen green bond sale, reports Bloomberg. It would mark the group’s first corporate note deal since the mammoth postal firm was formed in 2007 as part of a privatisation move.
The Tokyo-based company hired banks for a sale of about 30 billion yen (JPY) – around US$220 million – of notes whose proceeds will be used for environmentally-friendly buildings, the firm said in a statement.
In May Japan’s prime minister Fumio Kishida announced a plan to issue an estimated JPY20 trillion (US$157 billion) worth of “green transition” bonds to help finance investment to achieve a carbon-neutral society.
More companies offer supply chain financing to vendors
Shipping logjams and strains over inventories since the Covid-19 pandemic are raising the profile of supply chain finance (SCF), according to The Wall Street Journal. The paper reports that more companies are offering the tool to their vendors, providing suppliers with faster access to cash and the ability to push back bill payments.
BCR Publishing estimates the corporate SCF market grew last year to US$1.8 trillion globally, an increase of 38% from 2020. The growth signals the growing financial stress in supply chains as companies have sought to replenish inventories even as bottlenecks at ports and components shortages have tied up goods and working capital.
S&P Global Market Intelligence says inventory levels at S&P 500 companies increased 15% during the first quarter of 2022 from last year, to US$1.13 trillion, as suppliers rushed to keep up with retail and manufacturing orders.
Rising interest rates around the world also drive demand for SCF, as the programs provide suppliers with a relatively cheap source of cash.
Citi closes municipal proprietary trading desk
Citigroup’s municipal-bond business, for decades a powerhouse in the US$4 trillion market for US state and city debt, has reportedly seen a wave of high-profile departures as the bank revamps parts of the group’s trading and banking units.
The reports add that in recent months the bank has spun off its muni proprietary business unit - which used the firm’s own cash for trading and investments – to focus on providing more of its balance sheet to large, institutional clients. Insiders say that Citigroup offered buyouts to more than a dozen senior businessmen, bankers and salespeople, leading to further departures across the group as rivals quickly shifted talent.
The New York-based lender was the US’s second-largest municipal underwriter since 2015, but dropped to fifth this year, according to data compiled by Bloomberg. If retained, the ranking would be Citigroup’s lowest annual performance since at least 2012. Taken together, the personnel change and the decision to restart business offerings have raised concerns that the bank is taking a step back from its once-public-finance business.
The shakeup is thought to have begun shortly after Citigroup held its investor day in March, when executives vowed that the bank would focus its attention on higher-margin activities within its trading business and better serve the unit’s largest institutional and corporate clients.
However, the muni business suffered a setback in late 2021 when Republican politicians in Texas sought to punish Citigroup for recent changes to its policies for lending to gun retailers. After a month-long pause, the bank resumed underwriting in the state – the second largest market for muni deals – in November, but the dispute may have contributed to an exodus of bankers from the unit.
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