T N Ninan: Banking on non-solutions

A sure sign of the system having started to immobilise yet another government is when it starts looking for non-solutions, and when its key personages start mistaking activity for action. Listen to Jayant Sinha, a man with impeccable credentials - he is a product of the Indian Institute of Technology in Delhi and of Harvard Business School. He has been a partner at McKinsey, and ran Omidyar Networks in India. He has political pedigree too: his father was an under-appreciated finance minister in the Vajpayee government. The young Mr Sinha, still in his early 50s, could be a poster-boy for a government that is keen to show results.
 

So yes, let's listen to him on what he is doing about one of the biggest problems standing in the way of economic revival: the state of the government-owned banks. Mr Sinha says he has held four rounds of meetings with the banks, and plans to hold a fifth meeting with southern banks-to assess their need for fresh capital. He says the government's banks will be strengthened with a "comprehensive package" (always, that give-away phrase). There will be a "transparent" process of selecting the chiefs of the banks, they will be given operational "autonomy", and governance will be improved (does that sound like an old tape replayed?). Most importantly, they will be given the capital they need, but they will not raise capital from the market. Why not? Because at their current share prices, any public issue would be at "distressed valuation". He is right on that, of course. So, Mr Sinha says, he will first improve the ratio of market price to book value, taking it to the levels that private banks enjoy.

The odds on his success are long, very long. All but one government-owned bank now has a market value that is at a huge discount to its book value; for half the government banks, the discount to book is more than 40 per cent - which only means that the market does not believe that the banks' books tell anything even close to the truth about their financial health. The result: just five government banks out of 24 have a market value higher than that of tiny Federal Bank. Meanwhile, the leading private banks enjoy stratospheric market prices that are multiples of book value.

The operative message, therefore, is that until Mr Sinha is able to multiply the value of the government's banks four-fold and more, the public will continue to pay for these banks' sins. How much? Rs 2.4 lakh crore over the next three years, says Mr Sinha. And what is the money provided in this year's Budget? Rs 7,940 crore. The numbers don't add up, do they? No, and it does not help when the government says it will cough up more capital than budgeted; what happens then to fiscal discipline?

Meanwhile, the stock market is telling us something. Over the past year, the market value of 23 out of 24 listed government banks has fallen. Punjab National Bank has seen its value crash by 84 per cent. Central Bank's drop is 53 per cent, and Bank of India's 38 per cent. Some have fallen by relatively little - eight per cent for Bank of Baroda, for instance, but it is in a minority. In all, 17 banks have seen their value drop by more than 20 per cent. The solitary exception to the trend of falling valuation is State Bank of India, which has better leadership. So while Mr Sinha puts his comprehensive package in place, investors are fleeing. The result is that the combined market value of all government banks (leaving out SBI) is less than the new capital that Mr Sinha intends to provide, using tax-payer money. The problem with this bottomless-pit approach is that, like so many of his predecessors, the minister is looking for managerial solutions instead of market-driven ones.