India is one of those countries that are on the path of financial progress, though on this path, the country is taking some strange steps and oversees its own future in a slightly different way. There is no one specific answer to that whether it is good or it is bad, it is definitely not something we all expected.
The financial minister Nirmala Sitharaman announced in the Union Budget that the financial sector is about to include the full privatization of two of the 12 public sector banks. Some new reports also suggest that the Bank of Maharashtra, Bank of India, and Indian Overseas Bank as well as Central Bank of India have been shortlisted with the objective. The public sector banks have been waiting for this occasion for quite a long while, not willing but bleeding for the Indian exchequer symbolized in yet another recapitalization of ?20,000 crores in the same budget.
The markets are currently observing the changes and the final outcome of who gets control of the banks finally is one of the most interesting topics. The Indian banking sector is getting concentrated with very limited players. Whether the two banks go to existing players or new ones has to be seen in the context of the recent controversies around the Indian corporations. There are big question marks standing at the bottom of the sentence should or should not the Indian corporates be owning the whole bank.
Another even more interesting topic is now the Govt. is obliged to set up an Asset Reconstruction Company Limited and Asset Management Company which will have the obligation of buying the stressed assets of the public sector banks and sell them to foreign investors. Moreover, the foreign engagement of the investors is increasing from the forex industry as well. The changes in the public banking and privatization sector may affect the local forex market as well.
Apart from privatizing banks and establishing what appears to be akin to a bad bank, the government has also decided to privatize a general insurance company and make legislative changes for the listing of the Life Insurance Corporation, also known as LIC. This has implications for the financial sector as the government owns LIC, and LIC not just owns the Industrial Development Bank of India (IDBI) but also has stakes in several other financial organizations. There is also a proposal to increase foreign direct investment in insurance from 49% to 74%.
Not only the LIC stock prices may drastically be affected by the purchase, but also the outflow of the foreign currency and the lack of local financial support may be an issue in the overall economic situation of India.
While the government is limiting any current foreign investment in the banking sector, as well as limiting investor participation, currency trading companies have started offering Forex welcome bonuses in local currency pairs to attract new clients and offset shortages. These decisions are monumental as they reverse a long history of nationalizing the financial sector.
The nationalization process
The first time LIC was nationalized was back in 1996, which is more than 10 years prior to the nationalization of the general insurance companies.
There is one more brilliant idea proposed by the government which once again takes the country back to where it started. The Development Financial Institutions, also known as DFIs. They were first introduced back in the 1960s and were almost instantly banned. There were several existing DFIs and most of them were struggling or were converted to banks as their business models were not relevant at all.
Why would the government consider that copy-pasting something that did not work completely in the past, would work now, still remains the question. Perhaps the DFI has a better governance structure and clear targets this time, with avoiding turf wars.
The better solution for the current situation is to develop the corporate bond market, which the Indian capital market has long been waiting for. The local government has proposed setting a regulatory authority that will purchase the investment-grade debt securities both in the stressed and normal times for the country’s economy. This will be like the primary dealer system established in the 1990s to build activity in government bond markets, once again taking it back.
The new policies allow retail investors to open a securities account with themselves to buy and sell government securities. This is all in order to maintain all the major retail businesses within the country and by the local businesses. For a long time, authorities have tried to open government bond markets to retail investors, and at this point, the road is getting wider, by giving the investors more investment options.
The Indian retail market is struggling with the enlargement process and the RBI’s at this point decided to take everything under their own control. Though even if that is not the main intention the move does put RBI in competition with the banks and mutual funds for the retail savings. In case some major crisis happens, which is very likely and realistic especially due to the global economic crisis, all the depositors now have the incentive to shift their funds not only between banks but also to RBI. Some sort of announcement regarding the Indian central Bank Digital Currency has also been made, though without any further definitions.
