JOIN USLast year, a Reserve Bank of India (RBI) committee headed by P Nayak 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 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.
The most crucial of these is recommendation 3, as most of the ills associated with the functioning of PSBs have a lot to do with continued majority ownership (this corresponds to 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 (CMD/MD, executive directors etc) 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.
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 4,00,000 crore. Including restructured assets (bad loans made to look like normal assets by relaxing payment terms), the total stressed assets are Rs 8,00,000 crore or 11.25% of gross advances. For PSBs alone, this is much higher at 14%.
The problem has been building for more than a decade. Determined to take the bull by the horns, RBI Governor 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 the third quarter of 2015-16 (State Bank of India alone is at Rs 20,000 crore] and the process will continue till last the quarter of 2016-17. The resultant erosion in their capital base has set off the alarm bells.
According to Finance Minister Arun Jaitley, PSBs need a capital infusion of Rs 2,00,000 crore over 4 years up to 2018-19 to meet Basel III norms. Of this, the government has committed Rs 70,000 crore as Budget support – Rs 25,000 crore each during 2015-16 and 2016-17 and Rs 10,000 crore each during 2017-18 and 2018-19. But, garnering the remaining Rs 1,30,000 crore will be a herculean task!
Much ado has been made about the economic downturn, especially during the last three years of UPA II rule, which undoubtedly had a debilitating effect on the ability of promoters to generate adequate cash flows to service the loans. The 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, could one justify the IDBI bank giving a loan of Rs 900 crore to Kingfisher at a time when the company was in doldrums having ‘negative’ net-worth? No wonder, a number of such loans have turned into NPAs/ stressed assets.
A tough task
Recovering money from such defaulters is proving to be a nightmare as existing laws such as SARFAESI Act and the Debt Recovery Tribunal (DRT) lack teeth. The situation may improve after the Bankruptcy Code and Insolvency Law is passed. But, given the present arithmetic in the Rajya Sabha and opposition by a majority of the members, it is not going to happen any time soon.
It may be possible to recover a portion of loan through settlement with borrowers (getting back some amount is preferable to a complete write-off). But, the management cannot take that route either due to fear of inviting the ire of statutory bodies like the Comptroller and Auditor General (CAG), the Central Vigilance Commission (CVC) and the Central Bureau of Investigation (CBI).
Meddling in the affairs of PSBs also involves their frequent use for absorbing liabilities created by populist policies such as supplying power to farmers and households at subsidised rates, or even free in some states. For instance, the financial restructuring package (FRP) early this year to address resultant gargantuan debt (Rs 4,00,000 crore) of state electricity boards would entail a 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. Talking of this virtue last year, Modi opined “henceforth, PSBs won’t get even a phone call from my office or any other ministry”. But, this is next to impossible in a scenario where majority ownership and control rests with the government.
Without divestment of the government’s holding in PSBs to below 50%, it is impossible to secure their autonomy. But, the Modi dispensation has said ‘no.’ It doesn’t even have an intent to dilute its holding to 51%, a level at which the government will remain in the driver’s seat.
Jaitley says he will take up the case only after the health of PSBs is rejuvenated. But, that won’t happen until managements are liberated from controls. It sounds like putting the cart before the horse! PM Modi needs to change the strategy before it gets too late.
(The writer is a New Delhi-based policy analyst)