For generations, public sector banks [PSBs] have been used by the political establishment with impunity to appease their constituencies viz., waiving farm loans especially at the time of elections; salvaging state electricity boards [SEBs] who are made to supply power at throw away tariffs or even free in some states; granting loans to favoured industrial houses without carrying out due diligence and allowing wilful default by certain borrowers [involving quid pro quo] which are clear acts of corruption.
All such exogenous imposed actions in total disregard of financial prudence have led to proliferating non-performing assets [NPAs] – a sophisticated nomenclature for bad loans or in simple terms, money lent which cannot be recovered. Together with restructured assets [these are also nearly bad loans whose terms viz., period of repayment, interest rates etc have been relaxed to make them look like a normal asset, which they are not], total stressed assets range from 12-15% of their advances.
To meet Basle III norms for capital adequacy [to cover increase in lending and provisioning for stressed assets], PSBs will need a capital infusion of Rs 200,000 crores over the next 4 years. Of this, the government will provide Rs 70,000 crores by way of budgetary support [Rs 25,000 crores each during 2015-16 and 2016-17 and Rs 10,000 crores each during 2017-18 and 2018-19]. Of the balance Rs 130,000 crores, banks are expected to garner Rs 110,000 crores from divestment of shares to public and Rs 20,000 crores from internal accrual.
As regards its contribution, the government is placed in a comfortable position due to savings in subsidy on petroleum products made possible by steep fall in international price of crude oil on one hand and buoyancy in indirect tax collections [up by 37% during April-June, 2015] on the other. The transfer of much higher surplus from RBI [about Rs 65,000 crores during current year up from Rs 52,000 crores in 2014-15] has further added to the comfort. However, for banks to do their bit is going to be a herculean task.
The biggest stumbling bloc coming in the way of PSBs ability to mobilize required resources is none other than their stressed balance sheets courtesy, high NPAs which has led to much lower valuations [for several banks, the market price is even less than their book value]. Therefore, divestment of their shares is unlikely to fetch a good price. For the same reason, their ability to generate internal resources is also hampered.
But, the bigger problem is structural and systemic. It has to do with government ownership of PSBs and associated controls. All along, the political establishment has used the ownership to interfere in their functioning. Such interference went much beyond formulation of policies to embrace appointments to top managerial positions and even in day-to-day functioning. It was so deep rooted that it prompted Modi [who is totally committed to autonomy of government undertakings] to opine “henceforth, management won’t get a call from PMO or any other ministry.
In view of above, the most effective way of stemming the NPAs is to grant PSBs full autonomy and ensure their running in a professional manner. In this regard, the P Nayak committee had recommended (i) setting up of an autonomous Bank Boards Bureau [BBB] with a mandate to select the top management and guide their operations; (ii) setting up of a bank investment company [BIC] where all government shares in PSBs will be vested and (iii) divestment of its shareholding in all PSBs to below 50% leading to relinquishment of management control.
Of the aforementioned recommendations, the government has maintained a studied silence on (ii) and (iii). This would mean that at least for now, it has no intention of relinquishing management control nor it is willing to distance itself from managing operations of banks [a task that Nayak committee would like to be handled by BIC, an arrangement mooted on the lines of Temasek Holdings, Singapore which has delivered excellent results]. It has only expressed its intent to go ahead with setting up of BBB.
Herein also, the government has not accepted the committee’s recommendation wholeheartedly. In sharp contrast to the committee’s view to draw all members from the fraternity of ex-chairmen of PSBs [to make it truly autonomous], it has proposed to include 3 representatives from government and 3 from the RBI. This means that the BBB shall not have freedom to appoint the management team and formulate policies in regard to functioning of banks.
It may well be that even while retaining its majority ownership [51% or above] and control over their working, the government would still be giving complete freedom to the management to run banks professionally. The type of governance it has delivered in the last 15 months, undoubtedly Modi – dispensation inspires confidence [though this remains to be tested with respect to PSBs; for instance, having first declared its intent to take candidates from private sector for CEO/chairman and even filled a couple of positions then, to backtrack gives contrary signals].
But, what is the guarantee that Modi – dispensation will continue to rule all through. What if post-2019 elections, the new government is run by a different political party and with it the old practices of continuous interference in working of banks are resurrected? Even now and for next 4 years with Modi at the helm, market valuations are unlikely to improve unless the government divests its majority holding in PSBs.
This is because with government’s majority ownership, a bank automatically comes under the scanner of a plethora of statutory authorities such as CVC [chief vigilance commissioner], CAG [comptroller and auditor general], PAC [public accounts committee], RTI [Right to Information Act] etc. This inhibits the ability of managements to take risks and make smart moves which are so essential to enable PSBs increase profitability and stay afloat under a competitive environment.
Given the monumental challenges facing PSBs, it is imperative that government goes for major reforms that involve bringing down its holding to below 50% and distancing itself from their day-to-day running. These changes should be put in place through requisite legislative enactments so that subsequent ‘pliable’ political establishments have no scope whatsoever to alter to serve their vested interests.
While, the decision of government to infuse a good amount of capital in to PSBs is welcome, this is at best a temporary reprieve. A sustainable solution lies in ‘unshackling’ them as without it, it will be impossible to garner a mammoth Rs 130,000 crores to meet capital adequacy norms; not just that, they won’t be able to stem drain on their resources [albeit through political patronage, largesse/bail-outs, inefficiencies etc] and scourge of rising NPAs will continue to haunt them.
Modi needs to shed the inertia – a legacy from past – and in sync with his image of a die-hard reformist should move ahead with implementation of Nayak committee recommendations in Toto.