PSBs to get Rs 70000 cr: A good start, but Jaitley should move to plug the leaking pot

Finally, the NDA government has become proactive in addressing the woes of India’s ailing public sector banks (PSBs). On Friday, the finance ministry said it plans to infuse Rs 70,000 crore until March 2019 in these banks, over and above what was allocated in the 2016 Union budget.

The government estimates a capital requirement of Rs 1.8 lakh crore for PSBs in the next four years. It wants banks to raise the remaining Rs 1.1 lakh crore from market and by selling their non-core assets. Of the promised Rs 70,000 crore, about Rs 25,000 crore will be infused in the current fiscal year. The Reserve Bank of India (RBI), which has been cautioning on the government’s initial reluctance to fund banks, has reacted positively to the move.

As Firstpost has been arguing in the past, the government had no option but to urgently recapitalise PSBs in the face of huge non-performing assets (NPAs) on their books and severe scarcity of funds even to resume credit expansion to aid the nascent recovery seen in the economy. The government’s earlier plan to award capital to only top-performing (in terms of RoA and other efficiency parameters) on short notice lacked any logic since the government’s approach to PSBs was flawed from the beginning.

Having decided to provide capital to public banks, it is highly critical that the government simultaneously initiate structural reforms plaguing state-run banks. The question the government should ponder over in the first place is why PSBs are eternally capital-starved unlike private banks and why they always come back to the government with a begging bowl. The answer lies in the fundamental problems these banks face.

There is a serious conflict when the government kept insisting banks to pay annual dividends from profit, undertake financial inclusion activities incurring losses, direct lending to the high-risk farm sector without end-use monitoring and, on the other, deny capital citing poor performance.

The idea behind rewarding only performers is good, but after ensuring these institutions have sufficient autonomy and basic conditions to perform. The government could have avoided the embarrassment of being forced to reverse its bank recapitalisation strategy, had it addressed the problem correctly at the time of the Union Budget. Perhaps, Jaitley was poorly advised on this issue.

There are a few areas the government should act to address the fundamental problems of PSBs:

To begin with, the government should overhaul the HR practices in PSBs to improve the operational environment and address the manpower shortage in key positions. The government has indeed taken some steps to reform this area such as getting private talent in the key positions of banks.

But merely replacing the CEO with a private sector candidate wouldn’t do much of help unless similar changes are done in middle and senior levels to support such transition.

To be sure, there is no shortage of talent in the public sector banking space. Public sector bankers, with years of experience, are equally competent compared with the private sector. The real issue is absence of effective HR policies to promote the talent and fill the gaps on time. Second, the most critical part about improving the performance of state-run banks is offering them adequate autonomy to operate.

At present, this is not the case. “Your hands are tied behind and you are asked to perform,” said a senior banking industry official on condition of anonymity.

The government has been promising autonomy to PSBs for long. But even now, these banks are often forced to spend considerable amount of time following the government diktats and lend to specific sectors.

One example is Prime Minister’s Jan Dhan Yojana, where bankers are kept at gun point to fulfil targets for many months on end. “At a time, when bank branches are supposed to focus on recovering pending loan dues and seeking fresh deployment, branch managers are fully occupied with implementation of Jan Dhan Yojana. The government is also silent on who will incur costs on accounts with no activity,” said the banker quoted earlier.

To be sure, Jan Dhan Yojana, is a much needed scheme in a country, where almost half of the population still do not have access to formal banking mechanism. But, the government needs to provide for the losses banks will face in the initial phase from zero-balance accounts and, certainly, shouldn’t have rushed with the programme in rocket-speed.

Another issue is the political interference in the operations of banks at state levels. The government must ensure, PSBs are protected from such interferences.

The latest such instance is the recent clamp down of the Maharashtra government on about 24 branch mangers of various nationalised and cooperative banks for not meeting farm lending targets to farmers.

According to reports, banks disbursed Rs 1,036 crore loans in Amaravati as against the target of Rs 1,695 crore. Across 17 districts, banks have disbursed Rs 14,000 crore as against Rs 24,000 crore targeted by 30 June. The traditional notion that PSBs are milch cows should be changed.

In the long term, the government will have to move towards implementing radical reforms in the banking sector. These include cutting down government stake in these lenders below 51 per cent as recommended by the P J Nayak committee and merging some of the smaller banks with bigger ones, considering the business and cultural synergies.

The capital requirement of PSBs will only increase going ahead and the government will find it difficult to keep feeding them.

Remember, even under the current plan, PSBs are supposed to raise Rs 1.1 lakh crore from the market over the next few years. Unless the banks improve their profitability and asset quality position, there won’t be any major investor interest in these banks.

The bottomline is this: The Rs70,000 crore infusion certainly offers a breathing space for PSBs to clean up their balance sheets, but the government needs to simultaneously move quickly to bring in structural reforms. As of now, the government is pouring water into a leaking pot.