Lok Sabha Election Outcome May Hinder Execution Of Public Sector Bank Reforms: Analysts

Public sector bank-related reforms are likely to see some impact, especially when it comes to their execution after the Lok Sabha elections 2024 outcome favoured the formation of a coalition government.

According to analysts, while no major change is expected with regards to the initiatives in the banking sector, the execution of reforms may slow down or face some delays. Of these, the privatisation of IDBI Bank Ltd. and the potential privatisation of smaller PSU banks may be the most impacted.

A part of the public sector bank rerating has been primarily on the assumption that there is a fundamental change in the way of working at these organisations, Bernstein said in a June 4 note.

"Measures such as external hiring of senior management, specialised talent and even potential privatisation of smaller PSBs were seen as positive for the segment," it said.

However, a reversal in any of these efforts or an increase in populist measures like loan waivers would be a negative for the public sector banks, Bernstein said.

According to Dr. Bino Pathiparampil, head of research at Elara Capital, "privatisation of PSU banks is both an economic and political agenda. Such things could face a delay because of the underwhelming verdict that the BJP got. But it may not completely go off the rail; only a delay is expected."

Hemindra Hazari, a SEBI-registered, independent analyst, concurred and said that the privatisation of IDBI Bank may get delayed further as bringing about changes under a coalition government "may not be that easy."

"Media reports indicated that IDBI Bank would be privatised around FY25, but now, when there is a coalition government, it may not be that easy. There may be some resistance and possibly a discussion in Parliament too," he said. "...Anything that requires parliamentary approval requires more in-depth review too."

The government's capex programme, however, is expected to drive credit growth in the economy and eventually lead to growth in private capex, according to Pathiparampil of Elara.

"...This augurs well for large banks and valuations in the banking space have anyway come down. At this point, large private banks look attractively positioned," he said.

Bernstein, too, said in its note that with the government's focus on increasing capex and the private sector taking the lead on investments, PSU banks had seen a healthy growth in corporate credit.

"While a sudden reversal is highly unlikely in the near term, slower than expected growth in corporate credit could be a negative in the long term, especially for specialised infrastructure lenders, public sector banks and, to a lesser extent, large private sector banks," the note said.

Hazari, however, said that if the new government announces more welfare measures, there is a possibility of priority sector lending going up.

"...Demand appears to be a problem in the Indian economy... So, the new government has to not just increase capex but also the overall government expenditure," he said.

In addition, the microfinance and gold loan lenders may benefit more if the government indulges in more welfare payments, said Pranav Gundlapalle, senior research analyst at Bernstein.

"Assuming there is continuity in the government, there is no big change expected in the banking sector initiatives; concerns only arise if the government changes," he said.