BSD Banking Annual 2017: A new lease of life for public-sector banks

While recapitalisation will put public sector banks back on the growth path, governance reforms will be critical for a genuine turnaround

 The government’s Rs 2.11 trillion recapitalisation programme for public sector banks (PSBs) will solve many problems, but one crucial question remains: will PSBs fall back on their old ways and will the cycle repeat itself?
 
While PSB executives and analysts say the equity infusion has been substantial since 2015-16, it is tied to their turnaround plans, which are being closely monitored by the finance ministry. The finance ministry refused to release 25 per cent of the  allocated capital, as none of the 13 banks could meet the targets that were set in 2015-16 as part of the Indradhanush plan.
 
The government’s seriousness on performance improvement cannot be denied, but efforts in the area of governance reforms are far from adequate. A former PSB chairman said, “Even as performance improvement is getting close attention, governance reforms, which are crucial for the banks’ long-term existence, have moved at a tardy pace.”
 
A member of the P J Nayak Committee, which was set up in 2014 to review the governance of bank boards, said that very little has been done on the governance reforms front. While the panel had recommended a slew of suggestions, only two — formation of the Banks Board Bureau and splitting of the position of chairman and managing director into two — have been implemented.
 

The Nayak panel had said that there was a need to upgrade the quality of board deliberations in PSBs to provide greater strategic focus, which has begun with the government appointing professionals on PSBs’ boards. These experienced professionals will help in providing direction to bank managements. Arundhati Bhattacharya, former chairman of State Bank of India, says, “They should have the same kind of freedom that private sector boards have, and set the direction of the bank.”
 
There are seven areas that require detailed scrutiny by bank boards to improve governance, with business strategy and risk being the two most important. The other areas include financial reports and integrity, compliance, customer protection, financial inclusion and human resources, according to the Nayak panel.
 
The Nayak panel report had not been positive on recapitalisation of PSBs, as it would impose significant fiscal costs owing to lower productivity, steep erosion in asset quality and demonstrated non-competitiveness. If the governance of these banks continues as it is, it will impede fiscal consolidation, affect fiscal stability and eventually impinge on the government’s solvency.
 
Besides governance reforms, there is another gap at public sector banks — the grooming of and career planning for middle- and senior-level management, which will be critical for the next generation of leaders. However, this remains low on the priority list.
 
In the first week of January, the government moved ahead, seeking Parliament’s approval to spend an extra Rs 800 billion towards PSB recapitalisation bonds this year. It will also inject another Rs 180 billion, while banks will raise Rs 580 billion from the market. Recapitalisation bonds of Rs 550 billion will be issued in 2018-19.