Strong Medicine for State-run Banks

Mar 01 2015 : The Economic Times (Mumbai)

IN FOCUS - Strong Medicine for State-run Banks

Sangita Mehta





TIME TO DELIVER Poor lending practices of the past and constant political meddling have resulted in many of them performing below potential, leading to a surge in bad loans at a time when capital requirement is on the rise

The government, in its determination to change the structure of state-run banks, is reviving the idea of a holding company structure to hold its shares in them. As a first step, it is planning to constitute a bureau that will spearhead hiring of senior executives for banks and advise them on business strategy. The bureau will eventually morph into the holding company.

"The bureau will search and select heads of public sector banks and help them in developing differentiated strategies and capital-raising plans through innovative financial methods and instruments," Finance Minister Arun Jaitley said in his speech. "This would be an interim step towards establishing a holding and investment company for banks."

The government wants to reduce the banks' dependence on it for capital amid a tight fiscal situation. It has set aside `9,555 crore for the next fiscal year, against `6,990 crore this fiscal, for investment in state-owned banks, including Nabard.

"It (the bureau) will improve governance, lay norms for the appointment procedure and will screen candidates for the post," said TM Bhasin, chairman of Indian Banks Association and CMD of Indian Bank.

Both the government and the Reserve Bank of India are seeking to revamp state-run banks, which account for nearly three-fourths of the market share. Although these banks are large, poor lending practices of the past and constant meddling from the political system have resulted in many of them performing below potential.

Some of the decisions of the government are based on the recommendations of the PJ Nayak Committee on revamping corporate governance practices in state-run banks. The panel had suggested the splitting of posts of chairman and managing director, a plan that is already being implemented in banks such as Bank of Baroda and Punjab National Bank.

In the last seven years the govern ment has invested `68,724 crore in PSU banks. Capital will be a critical factor in running public sector banks as the new Basel norms require banks to hold higher capital to grow their loan book. India Ratings & Research has estimated that PSU banks will need `4.5 lakh crore in capital in the next three years to meet the Basel III accord. With the government in a fiscal consolidation mode, to bring down fiscal deficit to 3% of the gross domestic product, not much funding would be available for banks. So, it has directed them to improve their efficiencies.

The Economic Survey released on Friday said banks should be proactive in booking profits from their bond holdings that has been gaining in value. Instead of showing gains as profits, banks should sell them, provide for bad loans, and utilise the undistributed profit to create capital buffer.

Skeptics abound when it comes to changing the way state-run banks function. "A lot will depend on people who are selected in the committee and what kind of procedure they follow," said DK Mittal, former financial services secretary. "If the committee continues to have members from the RBI and finance ministry it would just be like old wine in new bottle. More significantly, there is a need to have more filtering in the selection of candidates and group discussions."