Last year, an RBI committee headed by P Nayak had made sweeping recommendations aimed at bringing about structural reforms of public sector banks [PSBs] to enable them meet expanding requirements of an economy on accelerated growth trajectory and improve its competitiveness among the comity of world nations.
The committee had recommended (i) setting up of an autonomous Bank Boards Bureau [BBB] with a mandate to select the top management; (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%. BBB was contemplated as an interim arrangement as a precursor to BIC.
The most crucial of these is recommendation (iii) as most of the ills associated with functioning of PSBs have a lot to do with continued majority ownership [this corresponds to share holding of more than 50%] and control by government. This brings the bank under a plethora of controls and monitoring/surveillance/vigilance and has the effect of shackling its management.
Armed with it, the political establishment makes all board level appointments [CMD/MD and executive directors etc] and deputes bureaucrats on bank’s board to represent its overwhelming ownership. In other words, the entire board is geared to listen to his master’s voice [read the political bosses] when it comes to taking policy decisions or even in its day-to-day running.
Today, the country is grappling with increase in non-performing assets [NPAs] of banks to unsustainable level. Currently, NPAs [loans which do not yield return] of Indian banks are about Rs 400,000 crores. Including restructured assets [bad loans made to look like normal assets by relaxing payment terms], the total stressed assets are Rs 800,000 crores or 11.25% of gross advances. For PSBs alone, this is much higher at 14%.
The problem has been building up for more than a decade. Determined to catch the bull by the horn, present governor, RBI, Raghuram Rajan got an asset quality review [AQR] of all PSBs done and directed them to clean up their balance sheets by March 31, 2017. Accordingly, all afflicted banks have made provisions on an unprecedented scale in third quarter of 2015-16 [State Bank of India alone Rs 20,000 crores] and the process will continue till last Qr of 2016-17. The resultant erosion in their capital base has raised alarm bells.
As per finance minister, PSBs need capital infusion of Rs 200,000 crores over 4 years up to 2018-19 to meet Basle III norms. Of this, the government has committed Rs 70,000 crores as budget support viz., Rs 25,000 crores each during 2015-16 and 2016-17 and Rs 10,000 crores each during 2017-18 and 2018-19. But, garnering the remaining Rs 130,000 crores will be a herculean task!
Much ado has been made about the economic downturn especially during the last three years of UPA – II which undoubtedly had a debilitating effect on the ability of promoters to generate adequate cash flows to service the loans. Modi – government deserves accolades for taking steps to revive the economy and even implement sector specific strategies [steel, power, highways, roads etc] to enable them come out of the morass.
But, the present crisis has also a lot to do with political interference inevitable in a situation of government’s majority ownership. For generations, a political-bureaucratic-industry nexus has been at work to finance projects on considerations other than purely economic and commercial. How else, one could contemplate IDBI bank giving a loan of Rs 900 crores to Kingfisher at a time when the company was in doldrums having ‘negative’ net-worth. No wonder, a number of such loans have turned in to NPAs/stressed assets.
Recovering money from such defaulters is proving to be a nightmare as existing laws viz., SARFAESI [Securitization and Reconstruction of Financial Assets & Enforcement of Securities Interest] Act and DRT [Debt Recovery Tribunal] lack teeth. The situation might improve after the Bankruptcy Code & Insolvency Law is passed. But, given the present arithmetic in Rajya Sabha and opposition by majority of the members, it is not going to happen too soon.
It may be possible to recover a portion of loan through settlement with borrowers [getting backing some amount is definitely preferable to a complete write-off]. But, the management cannot take that route either due to the fear of inviting ire of statutory bodies viz., Comptroller and Auditor General [CAG], Central Vigilance Commission [CVC], Central Bureau of Investigation [CBI].
Meddling in affairs of PSBs also involves their frequent use for absorbing liabilities created by populist policies such as supplying power to farmers and households at subsidized rates or even free in some states. For instance, financial restructuring package [FRP] sanctioned early this year to address resultant gargantuan debt [Rs 400,000 crores] of state electricity boards [SEBs] would entail sizeable hair cut by PSBs. Likewise, PSBs paid a heavy price for loan waiver given to farmers in 2009.
Clearly, PSBs cannot perform unless their managements are unshackled and granted full autonomy to run them on professional lines free from all encumbrances. Talking of this virtue last year, Modi opined “henceforth, PSBs won’t get even a phone call from his office or any other ministry”. But, this is next to impossible in a scenario wherein majority ownership and control rests with the government.
Without divestment of government’s holding in PSBs to below 50%, it is impossible to secure their autonomy. But, Modi – dispensation has categorically said “NO”. It does not even have an intent to dilute holding up to 51%, a level at which the government will remain in driver’s seat. Arun Jaitely says he will take it up only after their health is rejuvenated. But, that won’t happen until managements are liberated from controls. It sounds like putting the cart before the horse!
Modi needs to change the strategy before it gets too late.