It is now widely acknowledged that the health of country’s state-owned banks has become worse in the last two years.
Current state of these Banks:
- Stressed assets (including gross non-performing assets (NPAs) and restructured loans) on the books of state-owned banks were at 14% as of September 2015, dramatically higher than the 4.6% at private sector banks.
- It is possible that over the next few quarters, the reported gross NPAs will rise, given the pressure from the regulator to recognize bad assets as such.
- If gross NPAs rise, so will provisioning needs, which in turn will further weaken capital adequacy levels at these banks.
- In response, stocks of state-owned banks will fall further and their ability to raise equity will slide.
- Added to it is the possibility that another Rs.1 trillion in loans to state-owned power distribution companies may have to be classified as bad loans.
- Even, the government, the majority shareholder in these banks, doesn’t have the money to spare. It is already struggling to keep to its fiscal deficit targets.
- An offer for sale (OFS) to reduce shareholding to 51% in banks where the government holds more than the minimum requirement is a bad idea at this stage. Demand for shares of state-owned banks is low and these issues could easily bomb. Tier 1 bonds are an option but not for the large quantum of funds needed.
Thus, it is time for country’s smart bankers and policymakers to come together to find an out-of-the-box solution.
Reasons behind the failure of these banks:
- Lack of fresh capital injection: The state-owned public sector banks have been struggling to raise capital for a long time.
- Increasing Non-Performing Assets (NPAs): The increasing NPA listings are a wake-up call for PSBs and the government.
- Timeline for bank Board bureau: The selection of top management for PSBs has been a sore point in the banking history. Whenever a PSB has witnessed a change of guard at the top, their immediate quarterly performance has nosedived. Top management of various PSU banks have often been passing the buck to the preceding management for the poor numbers.
What can be done to improve their state?
- Sovereign bond: The relatively high yield offered by Indian issuers and nervousness around China has pushed investors towards dollar bonds of domestic firms. This opportunity should be utilized. However, it should be noted that the entire amount needed for bank recapitalization cannot be raised through such instruments.
- Rechanneling savings from oil: Since lower oil prices look like they are here to stay for a little longer, can subsequent savings from oil be pooled and set aside for bank recapitalisation. However, the government at present is utilizing these savings to meet its fiscal targets.
- Divestment: This hardly qualifies as an out-of-the-box option but there is always the choice of divestment to raise resources.
- Merger: The government could start the process of amalgamation of State Bank with the remaining subsidiaries to increase the size of the balance sheet by holding a constructive dialogue with the unions and officers’ associations.
Areas where public sector banks need a makeover:
- Technology: Private banks are grabbing every opportunity to innovate by leveraging technology. Right from the introduction of computers in banking, ATM machines and kiosks, to the launch of mobile applications, e-wallets and net-banking more recently, PSBs have never been leaders in these game-changing developments. This has been one reason why many tech-savvy “on-the-go” Indians have gradually shifted their preference towards private banks.
- Non-proactive assessment: A proactive assessment by specialists to analyze credit seekers could go a long way in bringing down the NPA levels of public sector banks.
- Ageing workforce: The lethargic working style and aging workforce of the PSBs need a drastic makeover to take the dynamism and market aggression of private banks head on.
What can the government do?
- The government can bring out a sea change in PSBs by doing just three things: appointing the right CEOs,backing them with the requisite capital and bringing independent directors of competence and stature on board. These can be done expeditiously with the existing mechanisms and the existing talent in PSBs.
- An overall change in the governance structure is the need of the hour for PSBs, to make them more competitive and to push up their market value.
The government, in August 2015, announced a seven-point action plan, Indradhanush to infuse professionalism and fresh capital in to public sector banks. As part of the plan, the government announced the setting up of Bank Board Bureau (BBB) that will give way to holding company to which the Centre will transfer the ownership of all these banks.
- But this strategy runs the risk of proving as ephemeral for want of some key reforms. Sensibly, the blueprint seeks to improve the functional autonomy of banks, restricted by government ownership and direct and indirect influence hawking by politicians and bureaucrats.
- The proposed Bank Boards Bureau, meant to curtail such interference, is a decided improvement over the status quo. But real reform is for the government to vest the ownership of all the banks in a single holding company, whose board comprises professionals of integrity. It can select PSB boards and oversee their working.
- Performance-linked bonus and Esops to management of PSBs is a good idea, but perks should not be restricted only for the top jobs. Many middle-level bankers slog hard at PSBs in the hope of making it to the top. They should be given a fair chance to rise, and their continuity should be encouraged at banks.
- The recent decision of the government to capitalise public sector banks based on their efficiency could go a long way in ending the muscle power that the state-run banks enjoy, if the government sticks to the strategy of selective infusion of capital. However, weaker banks’ survival would be in question as their ability to raise capital from the market would be limited because of mounting non-performing loans.
History is no precedent for the future as far as public sector banks are concerned. What has worked for them in the past may not do so now owing to the sheer pace of technology, innovation and customer-orientation that has swamped the banking sector. PSBs are in very real danger of losing not only their market share but also their identity unless the government intervenes with surgical precision and alacrity. Hence, policymakers and bankers need to put their heads together and come up with a smart option to resolve an issue that can no longer be put on the backburner.