Lowering govt stake unlikely to improve state-run banks' efficiency

Analysts say will have to bring down holding to under 50% for boards to be more professional

The Union Cabinet recently approved a proposal to lower the government’s stake in public sector banks (PSBs) in a phased manner, a move that could allow these lenders to raise up to Rs 1,61,000 crore from the market. This might offer state-run lenders a solution to their immediate capital needs but is unlikely to make them more competitive or improve their standard of governance, experts say.

“Reducing government stake might provide the opportunity for raising capital but it cannot be an automatic way to improving governance, productivity or profitability... Indep-endence of boards and the appointment process, as well as more flexible reward structure, tenures, etc, are all actions that require specific commitment, and not just reduction of stake,” says Shinjini Kumar, leader (banking & capital markets), PricewaterhouseCoopers in India.

At present, the government’s stake in 26 PSBs ranges from 56-82 per cent.

A committee set up under P J Nayak, former chairman & chief executive of Axis Bank, to review the governance of boards of banks in India. The Reserve Bank of India (RBI) in May had suggested, on its suggestion, the government consider reducing its stake in these lenders to less than 50 per cent. This would help restore a level-playing field for state-run lenders in the matters of vigilance enforcement, employee compensation and the applicability of the right to information, it had said.

However, despite the proposed stake sale, the government is likely to hold a minimum of 51 per cent in state-run lenders, at least for now. “There is a need for a behavioural change at the board level of public sector banks to tackle the problem of inefficiency. That will probably happen if the government decides to lower its stake to 26 per cent or so. The board will then become more professional, analyse business and sectoral risks in an efficient manner, and provide guidance in framing correct policies,” says Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services.

Shashwat Sharma, partner (management consulting), KPMG in India, has a similar view. “These disinvestment efforts are unlikely to solve some of the major problems of governance and autonomy. Most public sector banks are trading at lower levels than their book value, due to concerns over asset quality and earnings. There are many external constraints imposed on these banks; those will remain till the government’s stake comes down to under 50 per cent,” he says.

The proposed stake sale will strengthen public sector banks’ capital base but that must be complemented with other initiatives to solve the problem of governance and inefficiency, industry analysts point out.

“Reducing the government’s stake will enable raising funds from the market. It will enable the banks to meet capital adequacy norms. This is apart from the initiatives to improve governance. The P J Nayak committee report set out many recommendations on this. There are moves to separate the roles of the chairman and chief executive at public-sector banks,” says Deepak Haria, senior director at Deloitte in India.

Experts also believe a relief on the capital adequacy front will only be temporary. “The need for additional capital will remain as the economy grows and banks continue to drive financial inclusion. The government might not always be in a position to shell out the kind of capital public sector banks require from time to time. So this move (lowering stake) is only a temporary pain reliever,” Parekh adds.