How can Modi as PM transform Indian PSU banks? ( Source Moneycontrol.com)
CNBC-TV18’s Latha Venkatesh and Sonia Shenoy spoke with SS Mundra, CMD, Bank of Baroda; Vishal Goyal of UBS; and TT Rammohan, professor of banking and economics at IIM Ahmedabad to understand what how banks could fare under a possible NDA rule.
The big boy in the Indian stock market is the banking space, of which the public sector undertaking (PSU) banks are a key constituent. If the frontrunner to form the next government, the BJP-led National Democratic Alliance comes to power, what are the immediate challenges it will face and how has Narendra Modi’s handling of issues of finance been in his chief ministership? What are the immediate steps that a Modi government should take if the BJP strongman comes to power?
CNBC-TV18’s Latha Venkatesh and Sonia Shenoy spoke with SS Mundra, CMD, Bank of Baroda ; Vishal Goyal of UBS; and TT Rammohan, professor of banking and economics at IIM Ahmedabad to understand what how banks could fare under a possible NDA rule. (collected form MoneyControl.com .Link is given below)
Latha: What is it that you know about Modi’s tackling of finance or NDA’s tackling of finance? What would be the first thing you may expect him to do if he comes to power with respect to PSU banks?
Rammohan: To begin with, it is well to realize that it is not as if Modi has a magic wand for all the ills of the Indian economy. But so far as banks are concerned, there are one-two things which he did in Gujarat that may work to the benefit of public sector banks.
One of the first things he did after becoming chief minister was to get politicians out of bank boards and it is possible that he may attempt to do likewise with central public sector, including public sector banks. But having said that, it is not as if the problems in Indian banking have entirely to do with politicians sitting on boards and messing things up.
There is a much deeper and broader governance deficit that needs to be addressed and it is not a deficit that is confined to public sector banks, it includes the private sector as well and it is not confined to Indian banking, it is a worldwide phenomenon and the basic problem is one of improving board effectiveness and there is only so much the government can do. It needs to work closely with the regulator, Reserve Bank of India (RBI), in trying to bring about a boardroom reform.
Latha: Since you have also closely observed perhaps the working of the Gujarat state since you work in Bank of Baroda (BoB), let us take what Professor Rammohan is speaking about -- the NPA problem. Do you think that a new government, if it is backed by the government which has already shown its promise in Gujarat, will be able to better tackle, say, infrastructure issues? For instance, Gujarat has 24x7 power. Are you confident that NPAs for banking system may come down substantially, if the Gujarat experiment is replicated?
Mundra:: Let us understand one thing. One is that banking is a national activity. It is governed by certain set of rules which are ongoing and consistent regardless of any change. Let me also make it clear that Bank of Baroda’s presence is slightly bigger in the state of Uttar Pradesh (UP) than it is in Gujarat.
As Professor Rammohan also mentioned, the issues related to banks are well-known and some of these are policy-related, some are relating to the environment in which we are operating and in the last six-twelve months, I think there has been a much enhanced awareness about all these issues and a lot of work has already started. Capital needs of banks is a crucial point.
Today’s NPA problem exists but it has a lot to do with what happened post 2008, how infrastructure was a sunshine sector, and how the public-sector banks came forward in that period of stress to keep the economy going. Then a few things went differently than expected and so we are facing this situation today. [But a] resolution is also coming. There is great awareness across all segments and stakeholders and consistency of policy would continue.
Sonia: What is your view on what the steps could be that the new government should take in order to stem the rot at least as far as asset quality is concerned?
Goyal: There are two parts to it: external and internal. The NPA issue is obviously related to economy and so [there are ways] how the new government should try to tackle issues of infrastructure, power -- especially fuel supply, even on the coal side.
The second one is internal, which is [there should be] more PSU bank autonomy, efficiency and effectiveness because I don’t think they are given full autonomy the way private sector banks are given by their shareholders and boards.
So I think government may need to think about that either by reducing their shareholding or even keeping the shareholding but putting an independent board rather than with only government nominees and that autonomy will help. Because of lack of autonomy, we don’t see PSU banks as effective as private banks.
For example, in the NPL situation, currently PSU banks have almost more than double the NPA-plus-restructuring compared to private banks. That is lack of effectiveness. Third is efficiency, which is reflecting in their high cost to income ratios. So they have more branches, the number of profit-per-employee etc metrics would definitely look worse than their private peers. All this can change and can obviously improve the overall PSU bank space.
Link Money Control
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