Impact of privatization on non-performing loans of banks in Australia

Privatization of BAnk

Privatization has been seen as sales of government assets. It has also been interpreted to capture the transfer from the public sector to the private sector assets in terms of ownership, management, finance or control. Privatization is regarded as a mechanism to increase the values of non-performing loans of banks. Non-performing loan defined as the defaulted loan which is the sum of borrowed money upon which the debtor has failed to make the payment. The arranged payment is generally at least for 90 days. A non-performing loan is either default (non-payment) or almost close to being in default. If debtor starts making payment again on a non-performing loan, it becomes a re-performing loan even if the debtor has not caught up on all the missed payments. When a loan goes default for maximum three months (90 days) then that loan is viewed as a non-performing loan. Non-performing loans provision is a technique to overcome expected losses of non-performing loans. Practical implementation showed that the high ratio of non-performing loans involves huge amounts of systematic and well-planned provisions.

Australia adopted a comprehensive view of privatisation as a shift in focus from public to private, referring to ways in which there are substitutions for government ownership, government funding, and government provision. In Australia, privatisation has been part of general ‘microeconomic reform’ that has included the corporatisation of government business enterprises (GBEs), the competitive tendering and contracting out of a variety of formerly government-provided services, and the reform of utility industries, such as telecommunications, energy, water and transport. When a government business is actively competing with private firms, privatisation is relatively easy. Assets simply move from government hands to the private sector, sometimes without even changing the business name. For example, the Commonwealth Bank, the State Bank of New South Wales, Suncorp-Metway, the State Bank of South Australia and BankWest were all government-owned financial institutions that competed with private banks and finance companies before being privatised.

In the 1940s and 1950s the Commonwealth Bank was the central bank for Australia. The Reserve Bank of Australia took over this responsibility in 1959, placing the Commonwealth Bank in a related setting to numerous other regulated private banks. Deregulation of the Australian banking sector in the 1980s meant that there was little role for State-owned commercial banks. The

Commonwealth bank was privatised in three tranches during the 1990s. The first sale of 30 per cent of the Bank in 1991 was the first large privatisation by share float in Australia and it set the benchmark for future sales, like the sale of GIO and Qantas. In terms of economic welfare it appeared clear that the sale of the Commonwealth Bank made perfect sense. The bank operated in active competition with private banks and its functions were essentially identical to those private competitors.

The privatization of the Commonwealth Bank of Australia (CBA) was one of the earliest in Australia, with the first sale (through the public float of shares) starting in the 1991–1992 financial year and the final sale being completed in 1996. The privatization was the culmination of a number of changes that had taken place in the economy including deregulation of the banking sector, political motivation for privatization and the increased level of competition that accompanied deregulation. A major development that compelled the government to privatize the Bank was that changes in capital adequacy guidelines for the banking industry required increases in the CBA’s equity base which in turn would have involved continuing calls on the Federal government budget. The relatively poor performance of the bank was also a major contributing factor. As a government bank, the CBA seemed to be overstaffed and non-aggressive, particularly when compared to its rivals. The CBA was relatively inefficient and less profitable as compared to the private banks. The under-performance was attributed, inter alia, to the following reasons. First, the capital was inefficiently used. Managers of the Bank held a large proportion of the bank’s assets in low-risk and low-paying investments than did their private counterparts. Second, like most government enterprises, there was over-employment at the CBA as it had relatively larger staff than its private counterparts. Third, managers of the Bank organized work and monitored workers less efficiently than did private bank managers.

Analysis of the Bank’s performance relative to that of the private banks prior to CBA’s privatization found that from 1979 to 1985, the cumulative value of income tax concessions granted to the CBA exceeded the dividends paid by the Bank to the Federal government. The net income received from the CBA (dividends less tax concession) was less than the income tax received from each of the three major private banks namely the ANZ, NAB and Westpac. Furthermore, the CBA lagged behind the three major private banks in terms of profitability, efficiency and growth. The government, therefore, decided to privatize the CBA with a view to improving the Bank’s efficiency and profitability. The initial privatization occurred in 1991. The sale of the second and third (final) tranches was completed in1993 and 1996 respectively, with the privatization raising A$ 8.1 billion (Reserve Bank of Australia, 1997). Since its privatization, no detailed analysis has been done to ascertain whether the expected efficiency and profitability gains have materialized.

Australia’s Non-Performing Loans Ratio stood at 0.8 % in June 2018, compared with the ratio of 0.8 % in the previous quarter. Australia’s Non-Performing Loans Ratio data is updated quarterly, available from Jun 2004 to Jun 2018. The data touched an unprecedented high of 2.2 % in Jun 2010 and had recorded a lowest of 0.5 % in December 2007. Non-Performing Loans Ratio is calculated from quarterly Non-Performing Loans and quarterly Total Loans.

Australian banks take huge exposures to the extremely leveraged real estate markets. Commonwealth Bank and Westpac especially carry larger exposure to the national retail market. Higher provisions for non-performing loans will be seen now, which may hamper new credit creation and future profitability of these banks. While Australian banks currently pay good dividends, if that should change, bank stocks could be under pressure.