PSBs – give charge to a holding company

Reportedly, the Reserve Bank of India (RBI) has recommended to the Government of India (GOI) reduction in the shareholding of the latter in six top public sector banks (PSBs) viz. State Bank of India (SBI), Punjab National Bank (PNB), Bank of Baroda (BOB), Canara Bank, Union Bank of India (UBI) and Bank of India (BOI) to 51% in the next 12-18 months. In a recent meeting, the RBI had suggested reduction in GOI stake to 26% in PSBs. But, for now, its recommendation is to cut the stake to 51%.

Given its precarious financial position (courtesy, Covid – 19), the  union government is exploring all possible avenues for increasing revenue. In this larger perspective, it is looking to monetize its assets in public sector undertakings (PSUs) including PSBs. No wonder, it has latched on to the RBI suggestion. It is targeting revenue of Rs 25,000 crore from shedding its stake down to 51% in the mentioned six banks (this could even go up to Rs 43,000 crore, according to an estimate).

The mentioned PSBs have already started gearing for this as they have decided not to take any lumpy credit exposure and are taking steps to reduce their non-performing assets (NPAs) by one-third by the end of current financial year March 31, 2021. The centre and the RBI are closing monitoring the situation.

Is Modi – government really serious about bringing down its stake in PSBs to as low as 26%? Is it committed to their privatization? How has its thought process evolved? Does it have anything credible to show on ground zero?

At the outset, it may be noted here that the idea is not new. It was first mooted by the NDA – dispensation under the then, prime minister Vajpayee (1999-2004). It had proposed reduction in government’s shareholding in PSBs to less than 50% initially and eventually to 33%. That remained on paper.

In 2015, a RBI committee headed by P Nayak made sweeping recommendations to bring about structural reforms of PSBs in sync with the requirements of an economy on an accelerated growth trajectory and make it competitive among the comity of world nations. The committee 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 precursor to the BIC.

In 2016, the government approved the constitution of BBB as a body of eminent professionals and officials to make recommendations for appointment of whole-time directors and non-executive chairpersons of PSBs and state-owned financial institutions (FIs). It was also mandated to engage with the board of directors of all PSBs to formulate appropriate strategies for their growth and development besides, encouraging them to restructure their business strategy and suggest ways for their consolidation and merger with other banks based on requirement.

Initially headed by Vinod Rai, former CAG till April 2018; thereafter, BBB has been under a part-time chairman (a retired bureaucrat) and other part-time members. Recently, the term of BBB was extended for a period of two years beyond April 11, 2020 or until further orders whichever is earlier.

How much importance the government gives to BBB? Being headed by a part-time chairman (that too ex-secretary, department of personnel and training) and part-time members, that by itself conveys a lot. On recommendation (ii) and (iii) of the Nayak committee, there is hardly any movement forward.

Meanwhile, the government’s decided to divest its majority stake in IDBI Bank. But, things didn’t work out as planned and during 2018-19, the Life Insurance Corporation (LIC) was roped in to acquire 51% controlling stake in IDBI Bank. The acquisition was completed on January 21, 2019 with LIC being re-classified as promoter of the bank with management control and GOI continuing to be the co-promoter without management control. While, it is normal to see LIC in the role of a financial investor but, for it to be the owning and running a business enterprise (read: bank) is anomalous.

Most of the ills associated with the functioning of PSBs have a lot to do with continued majority ownership (share holding of more than 50%) and control by the 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 viz. CMD/MD etc (setting up of BBB has made little difference as it is headed by an ex-bureaucrat) and deputes bureaucrats on a 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.

In the past, meddling in the affairs of PSBs took the form of what came to be known as the cult of ‘crony capitalism’. The businessmen patronized by the ruling class managed loans on considerations other than merit and got them ever-greened (taking a new loan to payback the earlier one). Neither, the banks insisted on repayment, nor the defaulters had any sense of fear as those who are expected to take action, chose not to.

The political brass also rides piggy back on PSBs for absorbing liabilities created by populist policies such as supplying power to farmers and households at subsidized rates, (or even free in some states). Be it a spate of bail-out given to power distribution companies (discoms)  or loan waiver given to farmers etc. these have also inflicted heavy loss on PSBs.

No wonder, the country is grappling with high NPAs. In March 2018, gross NPAs (GNPAs) had reached a high 11.5% (14.5% for PSBs). These declined to 8.5% as of March, 2020; courtesy, a number of measures including resolution of accounts under the Insolvency and Bankruptcy Code (IBC). But, the ratio may worsen to 12.5% by March 2021 under the optimistic baseline scenario (14.7% under a severely-stressed). For PSBs, it would be much higher 15.2% (16.3% under severely-stress).

Since, 2014 we have a prime minister who has zero tolerance for corruption and vowed to put an end to ‘crony capitalism’. Modi’s commitment is best captured in his euphoric statement “henceforth, PSBs won’t get even a phone call from my office or any other ministry” (2015). Besides, the RBI had initiated an asset quality review (AQR) leading to recognition of NPAs which earlier had been swept under the carpet. This was followed by stringent action putting all prosecution agencies in the top gear to nab fraudsters and even attach their assets to recover money.

Undoubtedly, these measures can help in improving the performance of PSBs (but for the pandemic, one would looked forward to further decline in GNPAs) but, beyond a point this can’t be sustained so long as majority ownership and control remains with the union government. For improvement to be sustainable, it is necessary that their managements are unshackled and granted full autonomy to run them on professional lines. This in turn, will be possible only after its shareholding is brought down to below 50%.

The RBI’s recommendation that for now, government’s stake in 6 PSBs be reduced to 51% (the center is inclined to accept this) won’t achieve the desired objective. To get the intended results, Nayak committee prescription should be adopted.

In stage – I, the government should set up a BIC with eminent professionals as members. While, the position of chairman should go to a professional, member-secretary can be drawn from the bureaucracy. All of the shareholding of GOI in all PSBs should be transferred to BIC. The company should be given necessary authority to take all decisions on behalf of the union government and work with full autonomy and maintain arms-length from the latter.

The BIC should guide the management of individual banks to improve their working, prepare the road-map for divestment of majority ownership and control and execute it. It should look for suitable opportunity for sale so as to realize maximum value. The shares should be so distributed as to avoid concentration in a few hands to ensure that the management has greater accountability to the public.

It is equally crucial for the RBI to strengthen its ‘supervision’ and ‘surveillance’ over banks to guard against irregularities and mismanagement to prevent fiasco of the kind we have seen even in case of Yes Bank. It should also maintain strict vigil over auditors to ensure that latter do their jobs diligently.

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