Dishonesty In Freedom To Banks

Public sector bank autonomy: Only lip service so far-Business Standard-11.01.2015

Unless the government gives up control, functional autonomy at state-owned banks will remain a mirage

 

Much has been talked about minimal government interference in public sector banks in the past few days, especially during the two-day bankers’ retreat organised last week by the finance ministry.

Finance Minister Arun Jaitley and Prime Minister Narendra Modi's assurances of zero interference was followed up by a press release by the finance ministry saying that government banks can take commercial decisions without any fear or favour.

 

But one example shows how much autonomy this government is really willing to give to the banks: Bank chairpersons and executive directors were asked to travel in a luxury bus from Mumbai to Pune for the retreat, particularly those based in Mumbai. And government officials actually asked some of the bank officials if they indeed came together in a bus! 

 

Such lip service to bank’s’ autonomy is nothing new. The finance minister of the previous regime had also said roughly the same thing. P Chidambaram, after assuming charge for the second time as finance minister during the UPA regime, had said the UPA government would not unnecessarily interfere in the day-to-day affairs of the banks, and any advisory, if at all required, would be sent only after his approval.

 

Chidambaram’s statement came in the aftermath of the then financial services secretary sending letters to chief executive of public sector banks on regular basis which included directives on deposit and lending rates.

 

While Chidambaram maintained his promise to some extent, the ministry under him also instructed banks on different issues, pushing educational loans and lower interest rate for senior citizens, to name a few.

 

This government is not different. Here are two reasons why:

 

Jan Dhan targets: Banks have been given targets to open accounts under the Prime Minister’s Jan Dhan Yojana. The objective may be noble, but shouldn’t it be banks who should decide how far they can go, which is a function of parameters like work force, rural reach, business plan etc. The Reserve Bank of India has also asked for fostering financial inclusion in the country. But it has not set any targets. Instead, banks have been asked to give their financial inclusion plan.

 

Appointment of chief executive: Is the appointment of a chief executive not a commercial decision? For private sector entities, it is one of the most important business decisions, where the board decides such an appointment. The government, as the majority owner of the banks, appoints the chairman and managing directors and executive directors. The eligibility criteria are also set by the government.

 

As long as the government does not reduce its controlling stake the banks, autonomy will continue to be no more than sound bites. That is what bankers have recommended during the two day retreat. This was what the PJ Nayak committee – which was set up to improve governance in banks – has also recommended, along with a three phase transition process to reduce the government’s stake below 51%. 

http://www.business-standard.com/article/opinion/public-sector-bank-autonomy-only-lip-service-so-far-115010800191_1.html

 

RBI asks banks to chart cash course-The Telegraph

Calcutta, Jan. 10,, 2015: The Reserve Bank of India (RBI) has asked public sector banks to consider alternative routes to raise capital to comply with the Basel-III norms over the next five years.

RBI deputy governor R. Gandhi today cautioned that the decision of the government to gradually bring down its holding in state-owned banks might not be enough to meet their tier-1 capital requirements.

"Recently, it has been reported that the government is contemplating scaling down its holdings in public sector banks to 52 per cent. Definitely, this gives an elbow room, but this may not be sufficient to fully meet the capital needs of public sector banks under Basel-III norms since the projections are based on the minimum requirement," Gandhi said at an interactive session of the Bengal Chamber of Commerce and Industry here today.
Public sector banks are estimated to require around Rs 4.5 lakh crore in tier-1 capital, including Rs 2.4 lakh crore of equity capital.

Gandhi said public sector banks should consider options such as differential voting rights share capital, employee stock options and long-term bonds to raise capital.
The PSU banks are likely to have the freedom to choose the instrument with the government looking to grant them more autonomy.

Gandhi further said public sector banks, like their private peers, needed to participate more in the financial markets.

"The public sector banks need to engage proactively, especially in derivative instruments, for hedging risks," he said, adding that they need to develop robust and well-established treasury operations.

The government has infused Rs 58,600 crore in state-run banks in the last four fiscal years and plans to provide another Rs 11,200 crore in 2014-15 (April-March).
The capital infusion has been mostly through preferential allotment of equity by the banks.
Gandhi also said public banks need to diversify their credit portfolio to balance the risks.
The current credit composition is more skewed in favour of industry and infrastructure, while retail lending needs to be stepped up.

Appraisal revamp

The RBI deputy governor said PSU banks needed to revamp their performance appraisal system for better utilisation of talent.
"At present, the PAS (performance appraisal system) makes no meaningful distinction between individuals for identifying or deploying talent, skill and/or specialisation; nor does it guide the determining compensation," Gandhi said.

His comments come a week after Prime Minister Narendra Modi's government convened a two-day meeting of public sector bankers to suggest a road map for reforms.

On mergers, Gandhi said they should be considered solely by the banks on various factors and not be imposed from outside, like the government.
"If any merger is found to be commercially viable, it will be a strong one."
Stating that non-banking finance companies should not be considered as competitors to banks, Gandhi said these entities had a higher risk appetite than banks and could apply for small finance bank licence from the regulator.