Why PSU bank capitalisation must come with governance reforms
The government’s plan to recapitalize public sector banks (PSBs) is a commendable one. Both the amount and the timing are appropriate. The 2.11 lakh crore amount is the best possible number that experts have put on the table as required by banks. None expected the government will actually cough up so much.
It takes care of all loan losses so far, a good 50 percent of the provisioning that may be needed for known cases of stress and enough growth capital to fund at least 10 percent loan growth for the next two years.
But it is the timing that is impressive. It comes only after government and RBI took a series of steps to send a message to bankers and borrowers that they better shape up. First, in 2014, RBI ended the unnecessary permission given to banks to restructure loans indiscriminately after the global financial crisis. Then it built a database of loans across banks (called CRILIC), so that each bank knew the entire loan liabilities of each of their borrowers. In Dec 2015, RBI forced banks to recognize a bunch of large stressed loans as NPAs, whether or not they were paying interest. Most of these were repaying only because bankers were lending them enough money in surreptitious ways to keep the account green.
In 2016, government passed the Insolvency and Bankruptcy Code that made it easier for creditors to dispossess defaulting promoters and sell the companies or assets to new promoters. Finally, in 2017, RBI and govt forced banks to march the top 50 odd defaulters to the NCLT. The final Act came on Tuesday when the government decided enough had been done to punish wrongdoers and it was time for positive action. It announced a massive recapitalization of the public sector banks to, once and for all, make good the loan losses and go ahead and lend clean loans to healthy companies.
The question now is has the government done enough to ensure that the public sector banks won’t slip into their lousy ways again.
Let us recall why the banks lent indiscriminately. One, there is much political interference in banks with their boards being stuffed with nominees from political parties or downright corrupt fixers.
Two, the majority government ownership makes PSU bankers answerable to the CVC, CBI, CAG and courts preventing quick decisions to accept some losses and forge ahead in hopeless cases. The four Cs make bankers prefer inaction to loss-reducing actions that may be questioned on hindsight.
Three, public sector banks are hamstrung in terms of hiring efficient personnel laterally and compensating them competitively. Four, they are unable to run their companies nimbly, shutting down unviable businesses or acquiring good ones, or enthusing their staff with monetary incentives and disincentives.
These ills and handicaps haven’t ended and won’t end till the government changes the legislative framework. The overbearing influence of politicians and ruling party on the boards of PSU banks is possible because of the Banking Regulation Act.
Scrapping this Act and bringing banks under the Companies Act is a reform that should have come 15 years ago. The Companies Act, in the very least, allows for a majority of independent directors who can safeguard the interests of the bank.
A second and equally urgent reform is to bring down the stake of the government in public sector banks below 51 percent. This will remove the pressure on bankers of having to defend commercial actions to the four Cs. It will also allow for competitive hiring.
But the third and the most important reform measure that the government needs to announce is that it is willing to sell off some PSU banks. The very whiff of privatization will fetch a better price for all PSU banks who are looking to raise capital. Today a raft of retailers, non-bank finance companies and fintech companies are looking for ways to reach out to semi-urban and rural India and government has probably the best chance to find buyers for midsized public sector banks that have excellent branch networks and ready-made customer bases. Everyone agrees there is no need for the government to have 15 nationalized banks.
While mergers ought to be encouraged after the banks fully recover from the NPA pain, privatization or selling at least some of the banks is absolutely necessary. Given the deep financial holes in some of the banks and the uninspired staff, many banks look set to become as sick as MTNL or Air India.
The government needs to sell them off while they are still perceived as commercially viable. Their unfunded pension liabilities may make then unattractive, but a way has to be found to put a lid on the liabilities and sell off these units.
Despite the immediate stock market cheer, global investors and eventually even domestic taxpayers will look askance at a tax-funded recapitalization programme unless it comes with definite steps that makes the PSU banks more commercially viable. The shift to Companies Act can begin rightaway. Privatization may have to wait for this government’s next term. But the intent must be announced rightaway.