Privatisation of PS Banks or Merger Of banks

Privatize PSU banks, change governance structure: RBI panel--Live Mint

The panel suggests the govt should either privatize or merge banks it owns, or design a radically new governance structure to allow these banks to compete successfully

By Anup Roy & Dinesh Unnikrishnan ( My views given below)

Mumbai: A Reserve Bank of India (RBI) panel set up to review governance of bank boards has suggested that the government should either privatize or merge state-run banks, or design a new governance structure for these banks to allow them to compete better and avoid repeated requests for recapitalization.

The panel suggested privatization or a different governance structure in view of the low productivity and steep erosion in asset quality and “demonstrated uncompetitiveness of public sector banks over varying time periods”.

The panel, headed by former Axis Bank Ltd chairman and Morgan Stanley India head P.J. Nayak, has also suggested significant changes in the shareholding pattern  of banks.

The panel suggested that the RBI should designate a specific category of investors in banks known as authorized bank investors (ABI), who would be allowed to hold as much as 20% in banks without regulatory approval. Such investors would include funds with diversified investors.

“ABIs would therefore include pension funds, provident funds, long-only mutual funds, long-short hedge funds, exchange-traded funds and private equity funds (including sovereign wealth funds) provided they are diversified, discretionally managed and found to be ‘fit and proper’,” the panel said, adding that the investor would be allowed to hold 20% provided that it does not possess the right to appoint a board director.

An ABI with a board representation should get 15% investment limit without regulatory approval. “Every other investor should be permitted no more than 10% without regulatory approval,” the panel said.

Currently, a single investor is allowed to hold only 5% stake in a bank without regulatory approval.

Abizer Diwanji, head of financial services at EY, said the suggestions are “impractical”.

“This is a large judgmental issue on letting a group of investors, with significant stake, be made fit-and proper after having the stake and not before it. This can never happen,” said Diwanji, referring to the committee’s suggestion that the fit-and-proper status of an investor need not be judged prior to investment.

The Nayak panel also recommends that if a bank is identified as “distressed”, private equity and sovereign wealth funds should be permitted to take a controlling stake of up to 40%.

Nayak panel’s recommendations come against the backdrop of rising bad loans in the banking sector, particularly on the books of state-controlled banks.

Till December, 40 listed Indian banks have gross non-performing assets (NPAs) of Rs.2.43 trillion, up 36%, from previous year. Of this, about Rs.2.19 trillion are with state-run banks. Besides the bad loans, an estimated Rs.5-6 trillion loans are being restructured in the banking system. Under existing norms, banks need to set aside up to 100% of the loan value if a loan turns fully bad and 5% of the loan value if restructured.

Rising bad loans have meant that banks need more capital to set aside as provisions, in addition to the higher capital requirements under advanced basel-III norms. According to RBI estimates, Indian banking system would require Rs.8 trillion of capital to sustain a loan growth of 20%. The government is struggling to meet these capital requirement for state-owned banks, in which it is the majority owner.

In the case of public sector banks, the RBI committee suggests that a bank investment company (BIC) be set up to hold equity stakes in banks which are presently held by government.

The autonomy of BIC should be ensured and the CEO of BIC should be a professional banker, the committee said, adding that the government should stop giving any regulatory instructions to banks applicable only to PSU banks as dual instructions are discriminatory.

The government should also consider reducing its holding in banks to less than 50% to enable a level-playing field for public sector banks in matters of vigilance enforcement, employee compensation and the applicability of the right to information.

“If such incentivisation requires the government to hold less than 50% of equity in BIC, the government should consider doing so, as it will be the prime financial beneficiary of BIC’s success,” the panel said.

Privatization will improve the governance standards in banks, said Shinjini Kumar, director (banking regulations) at audit firm PricewaterhouseCoopers Pvt. Ltd.

“The current deterioration in the operations and asset quality of public sector banks would mean that the government is constantly feeding the PSBs but not getting the returns. If you have shareholders with significant stake involved at the board level, this can help to improve the governance standards of banks,” Kumar said.

However, some of these suggestions may be difficult to implement.

“The government will never let its stake go down below 50%. Besides, there are various stakeholders like unions, employees etc. These recommendations will never be acceptable,” said Diwanji.

According to the RBI panel, constraints like dual regulation of public sector banks— by the finance ministry and RBI, short appointment tenure of the leadership in banks, low compensation, vigilance enforcement and applicability of the Right to Information Act, should be rapidly eliminated or significantly reduced in order to avoid erosion of competitiveness of state owned banks.

In addition the committee recommended a minimum five-year tenure for bank chairmen and a minimum three year tenure for executive directors.

Separately, the RBI panel proposed that the ownership ceiling for promoter investors be raised to 25%. Presently the promoters are required to bring down their stake over time to a maximum of 5%. The panel added that it is not for the RBI to stipulate a time limit for a new bank to list in bourses “as premature listing could be injurious to minority shareholder interests”.

The RBI should also raise the voting rights limit to 26% in banks to align it with Companies Act, the committee suggests.

Link LiveMint

My comments are as follows:

Banks were nationalized in the year 1969 with a sole purpose of extending banking services and loan facilities to poor villagers, farmers, small industrialists and traders who were not getting adequate support from the then set of private banks. Local money lenders used to exploit poor people when they used to approach for finance.

 Smt Indira Gandhi took the bold step of converting private banks into public sector banks so that social welfare motive of the Constitution enshrined in Directive principles could be achieved. If government of India decides to earn profit only by banks, then they should not cry for social welfare schemes, or financial inclusion or equitable growth of all sectors for all sections of people in country.

In a country like India where 90 percent of population are poor and where unemployment problem has become the most painful and dangerous problem of the country, India cannot afford to handover the banking sector to private sector and thus again force the common men to dance and die  as per dictates of promoters of these banks. 

Here it is important to mention that despite full freedom given to public sector banks and new private banks after launch of 1991 reformation era, these banks did not participate whole-heartedly and sincerely to social welfare scheme launched by the government during last two decades and did not extend desirable finance to poor people. Private Banks specially did not participate at all in financial inclusion and neither in poverty alleviation schemes.

Obviously All these banks Private as well as public sector banks during last two decades exerted all their mind and energy to earn more and more profit by bulk lending and by ignoring small traders, small farmers and small scale industrialists. Though private banks earned profit and grew by leaps and bounds in earning profit and in raising business during last two decades , public sector banks neither could protect their assets and nor could earn desirable profit.

As a result of this hunt for profit, public sector banks started competing with private banks without preparing necessary ground for it and without keeping in view the mindset of bank employees as well as politicians. They had to face ministers and politicians also not only to serve social objective but also to serve self interest of politicians.

Management of these banks could not reform Human Resource who are supposed to be backbone for healthy growth but they took unwise initiative and bold step to indulge in bulk lending to book highest profit in shortest period. They fully lacked in knowledge, skill and monitoring and they did not get legal support in recovery of loans from defaulters. Due to this, banks failed to keep banks assets in standard category.

As a consequence of this mismatch in mindset of public servants vis-a-vis private bankers and due to their blind and dreadful effort to compete their private counterparts, PS banks failed to serve not only social motive of nationalization but also miserably failed to protect the health of assets of the banks. Such mismanagement of assets created out of mismanagement of Human Resource jeopardized the interest of small depositors, small investors and small borrowers who reposed faith in banks because most of public sector banks are now sick of bad debts. Majority of PS banks are facing profit erosion and capital erosion.

As such it is not the issue of who are in the board or what the share of government in bank’s capital is. It is the question of quality, honesty, sincerity and integrity of workers and managers of these banks. It is the question of mindset of corrupt politicians who are ruling this country. It is rulers who can make or mar the basics of this country.

Not only banks, even judiciary, police system and administrative machinery all have become inactive, ineffective and corrupt only due to political intervention and political exploitation, and not due to faulty constitution of controlling body or board . 

If privatization is the panacea and solution to all problems , then Government should first handover the administration to private sector and slowly and gradually judiciary, police , CBI and other crucial regulating set up should also be handed over to private sector .

As such only privatization of banks may not prove to be fruitful unless and until administration machinery, judiciary and all other government departments are under the control of corrupt politicians. 

It is therefore ridiculous to imagine that banks can serve the desired purpose with safety and security of all merely by diluting government stake or by changing the rule for constitution of boards. Even if smaller banks are merged to make stronger big bank, the problem will not end as it has not ended in BSNL or in Air India or in Indian Railways.