Privatisation Of Banks

Privatize PSU banks, change governance structure: RBI panel--Live Mint May 2014

( See my comment below)

The panel suggests the govt should either privatize or merge banks it owns, or design a radically new governance structure to allow these banks to compete successfully

By Anup Roy & Dinesh Unnikrishnan ( My views given below)

Mumbai: A Reserve Bank of India (RBI) panel set up to review governance of bank boards has suggested that the government should either privatize or merge state-run banks, or design a new governance structure for these banks to allow them to compete better and avoid repeated requests for recapitalization.

The panel suggested privatization or a different governance structure in view of the low productivity and steep erosion in asset quality and “demonstrated uncompetitiveness of public sector banks over varying time periods”.

The panel, headed by former Axis Bank Ltd chairman and Morgan Stanley India head P.J. Nayak, has also suggested significant changes in the shareholding pattern  of banks.

The panel suggested that the RBI should designate a specific category of investors in banks known as authorized bank investors (ABI), who would be allowed to hold as much as 20% in banks without regulatory approval. Such investors would include funds with diversified investors.

“ABIs would therefore include pension funds, provident funds, long-only mutual funds, long-short hedge funds, exchange-traded funds and private equity funds (including sovereign wealth funds) provided they are diversified, discretionally managed and found to be ‘fit and proper’,” the panel said, adding that the investor would be allowed to hold 20% provided that it does not possess the right to appoint a board director.

An ABI with a board representation should get 15% investment limit without regulatory approval. “Every other investor should be permitted no more than 10% without regulatory approval,” the panel said.

Currently, a single investor is allowed to hold only 5% stake in a bank without regulatory approval.

Abizer Diwanji, head of financial services at EY, said the suggestions are “impractical”.

“This is a large judgmental issue on letting a group of investors, with significant stake, be made fit-and proper after having the stake and not before it. This can never happen,” said Diwanji, referring to the committee’s suggestion that the fit-and-proper status of an investor need not be judged prior to investment.

The Nayak panel also recommends that if a bank is identified as “distressed”, private equity and sovereign wealth funds should be permitted to take a controlling stake of up to 40%.

Nayak panel’s recommendations come against the backdrop of rising bad loans in the banking sector, particularly on the books of state-controlled banks.

Till December, 40 listed Indian banks have gross non-performing assets (NPAs) of Rs.2.43 trillion, up 36%, from previous year. Of this, about Rs.2.19 trillion are with state-run banks. Besides the bad loans, an estimated Rs.5-6 trillion loans are being restructured in the banking system. Under existing norms, banks need to set aside up to 100% of the loan value if a loan turns fully bad and 5% of the loan value if restructured.

Rising bad loans have meant that banks need more capital to set aside as provisions, in addition to the higher capital requirements under advanced basel-III norms. According to RBI estimates, Indian banking system would require Rs.8 trillion of capital to sustain a loan growth of 20%. The government is struggling to meet these capital requirement for state-owned banks, in which it is the majority owner.

In the case of public sector banks, the RBI committee suggests that a bank investment company (BIC) be set up to hold equity stakes in banks which are presently held by government.

The autonomy of BIC should be ensured and the CEO of BIC should be a professional banker, the committee said, adding that the government should stop giving any regulatory instructions to banks applicable only to PSU banks as dual instructions are discriminatory.

The government should also consider reducing its holding in banks to less than 50% to enable a level-playing field for public sector banks in matters of vigilance enforcement, employee compensation and the applicability of the right to information.

“If such incentivisation requires the government to hold less than 50% of equity in BIC, the government should consider doing so, as it will be the prime financial beneficiary of BIC’s success,” the panel said.

Privatization will improve the governance standards in banks, said Shinjini Kumar, director (banking regulations) at audit firm PricewaterhouseCoopers Pvt. Ltd.

“The current deterioration in the operations and asset quality of public sector banks would mean that the government is constantly feeding the PSBs but not getting the returns. If you have shareholders with significant stake involved at the board level, this can help to improve the governance standards of banks,” Kumar said.

However, some of these suggestions may be difficult to implement.

“The government will never let its stake go down below 50%. Besides, there are various stakeholders like unions, employees etc. These recommendations will never be acceptable,” said Diwanji.

According to the RBI panel, constraints like dual regulation of public sector banks— by the finance ministry and RBI, short appointment tenure of the leadership in banks, low compensation, vigilance enforcement and applicability of the Right to Information Act, should be rapidly eliminated or significantly reduced in order to avoid erosion of competitiveness of state owned banks.

In addition the committee recommended a minimum five-year tenure for bank chairmen and a minimum three year tenure for executive directors.

Separately, the RBI panel proposed that the ownership ceiling for promoter investors be raised to 25%. Presently the promoters are required to bring down their stake over time to a maximum of 5%. The panel added that it is not for the RBI to stipulate a time limit for a new bank to list in bourses “as premature listing could be injurious to minority shareholder interests”.

The RBI should also raise the voting rights limit to 26% in banks to align it with Companies Act, the committee suggests.

Link LiveMint

My comments are as follows: 15th May 2014

Banks were nationalized in the year 1969 with a sole purpose of extending banking services and loan facilities to poor villagers, farmers, small industrialists and traders who were not getting adequate support from the then set of private banks. Local money lenders used to exploit poor people when they used to approach for finance.

 Smt Indira Gandhi took the bold step of converting private banks into public sector banks so that social welfare motive of the Constitution enshrined in Directive principles could be achieved. If government of India decides to earn profit only by banks, then they should not cry for social welfare schemes, or financial inclusion or equitable growth of all sectors for all sections of people in country.

In a country like India where 90 percent of population are poor and where unemployment problem has become the most painful and dangerous problem of the country, India cannot afford to handover the banking sector to private sector and thus again force the common men to dance and die  as per dictates of promoters of these banks. 

Here it is important to mention that despite full freedom given to public sector banks and new private banks after launch of 1991 reformation era, these banks did not participate whole-heartedly and sincerely to social welfare scheme launched by the government during last two decades and did not extend desirable finance to poor people. Private Banks specially did not participate at all in financial inclusion and neither in poverty alleviation schemes.

Obviously All these banks Private as well as public sector banks during last two decades exerted all their mind and energy to earn more and more profit by bulk lending and by ignoring small traders, small farmers and small scale industrialists. Though private banks earned profit and grew by leaps and bounds in earning profit and in raising business during last two decades , public sector banks neither could protect their assets and nor could earn desirable profit.

As a result of this hunt for profit, public sector banks started competing with private banks without preparing necessary ground for it and without keeping in view the mindset of bank employees as well as politicians. They had to face ministers and politicians also not only to serve social objective but also to serve self interest of politicians.

Management of these banks could not reform Human Resource who are supposed to be backbone for healthy growth but they took unwise initiative and bold step to indulge in bulk lending to book highest profit in shortest period. They fully lacked in knowledge, skill and monitoring and they did not get legal support in recovery of loans from defaulters. Due to this, banks failed to keep banks assets in standard category.

As a consequence of this mismatch in mindset of public servants vis-a-vis private bankers and due to their blind and dreadful effort to compete their private counterparts, PS banks failed to serve not only social motive of nationalization but also miserably failed to protect the health of assets of the banks. Such mismanagement of assets created due to  mismanagement of Human Resource jeopardized the interest of small depositors, small investors and small borrowers who reposed faith in banks. Most of public sector banks are now sick of bad debts. Majority of PS banks are facing profit erosion and capital erosion.

As such it is not the issue of who are in the board or what the share of government in bank’s capital is. It is the question of quality, honesty, sincerity and integrity of workers and managers of these banks. It is the question of mindset of corrupt politicians who are ruling this country. It is rulers who can make or mar the basics of this country.

Not only banks, even judiciary, police system and administrative machinery all have become inactive, ineffective and corrupt only due to political intervention and political exploitation, and not due to faulty constitution of controlling body or board . 

If privatization is the panacea and solution to all problems , then Government should first handover the administration to private sector and slowly and gradually judiciary, police , CBI and other crucial regulating set up should also be handed over to private sector .
 

As such only privatization of banks may not prove to be fruitful unless and until administration machinery, judiciary and all other government departments are under the control of corrupt politicians. 

It is therefore ridiculous to imagine that banks can serve the desired purpose with safety and security of all merely by diluting government stake or by changing the rule for constitution of boards. Even if smaller banks are merged to make stronger big bank, the problem will not end as it has not ended in BSNL or in Air India or in Indian Railways.

All you wanted to know about Nayak panel's PSU banks report (source MoneyControl)

An RBI-constituted committee led by PJ Nayak Tuesday submitted its recommendations to improve the governance structure of state-owned banks and also to help private sector banks attract more capital.

An RBI-constituted committee led by PJ Nayak Tuesday submitted its recommendations to improve the governance structure of state-owned banks and also to help private sector banks attract more capital.


 Following are the key commendations of the panel: 


*Given poor asset quality and low productivity, either privatize PSU banks or transform governance structure to make them efficient.

 *Reduce government stake in PSU banks to less than 50 percent  

 *Remove dual structure of both Finance Ministry and RBI regulating PSU banks. Give all regulatory authority to RBI   

*Improve quality of PSU bank board discussions; focus on key areas like business strategy, financial reports, risk, and compliance.  

 *The government should transfer its stake in PSU banks to a holding company termed Bank Investment Company   

*Government should reduce its stake in BIC to under 50 percent and appoint a professional management for BIC 

  *For better accountability, BIC should be governed by The Companies Act 2013, and not the Bank Nationalisation Acts of 1970 and 1980  

 *Ownership functions to be transferred by BIC to the bank boards. Appointments of directors, CEO to be the responsibility of bank boards.  

 *Have uniform bank licensing regime across all broad-based banks, and niche licenses for banks with more narrowly defined businesses   


*Allow mutual funds , pension funds, PE funds to hold 20 percent in private sector banks, without having to take RBI approval   


*Allow promoter investors to hold up to 25 percent in private sector banks, against the 15 percent ceiling currently  


 *Ensure a minimum five-year tenure for bank Chairmen and a minimum three year tenure for Executive Directors


 *Private equity funds, including sovereign wealth funds, be permitted to take a controlling stake of upto 40 per cent in distressed banks 

*Allow voting rights in proportion to the stake held 

Link Money Control


RBI, not FinMin, should oversee PSU bank regulations: Panel The government periodically issues instructions to public sector banks, which have to do with regulations, as well meeting social objectives.

The PJ Nayak-led panel on governance of bank boards has recommended that public sector banks should be answerable only to the RBI, and not to both RBI and the Finance Ministry as is the case now. This would provide a level playing field for state-owned banks vis-à-vis their private sector counterparts, the panel said. "All regulatory functions of the Government need to be moved forthwith to RBI, freeing the public sector banks of dual regulation,” the committee said in its report. 


The government periodically issues instructions to public sector banks, which have to do with regulations, as well meeting social objectives.   In July 2012, the government had written to the CEOs of all scheduled commercial banks, public sector financial institutions and public sector insurance companies ‘may consider’ uniform card rates for bulk deposits for different maturities at least up to one year, so as to create a ‘level playing field’ for all banks. 


The circular warned that failure to do so would be treated as a violation of the government’s instruction. "The circular acts at cross-purposes with the regulatory regime of deregulated interest rates which RBI has established. 

In effect the government becomes a second regulator, with little sensitivity to whether its directives are consistent with RBI regulation,” the report said.

 Last October, the Finance Ministry had asked public sector banks to offer cheaper loans for customers wanting to buy automobiles and consumer durables, in an effort to boost demand in the economy.



 But even more damaging was the interference by the Finance Ministry in 2008 when it asked PSU banks to waive off Rs 76,000 crore worth of outstanding loans to farmers. "Any directions issued which are applicable to a subset of banks (PSU banks in this case) do damage to that subset, however laudable the objectives. 



Those banks not part of the subset (private sector banks in this case) are under no obligation to participate; if they do so the participation is voluntary, while for the subset it is coercive,” the committee said in its report.

 The panel said that for the government to issue other instructions in pursuance of development objectives solely to public sector banks was discriminatory and anti-competitive. "If the tasks are indeed laudable, they should be laid down for implementation by all banks. The straightforward way of doing so is to route it through RBI,” the report said.
Link Money Control

My Comments are as follows on Nayak Panel report on bank reforms---14th May 2014

In my view Nayak panel has done nothing or suggested no such good idea which may help in the improvement of health of Public Sector banks. Panel has not fixed responsibility of erring officials and erring ministers. What they have suggested is nothing but old wine in new bottle. This is purely an attempt to hide the past mistakes of top bankers and regulators and set up a new governance committee, new board for selection of top management etc. 

It has now become clear to RBI and Government of India that they have damaged the fundamentals of public sector banks and time is ripe now for public revolt against regulators. One crystal clear point which emanates from panel report is that RBI and GOI failed to do their duty in last two decades and it is their sheer negligence which has resulted in current critical sickness of PS banks. They remained silent spectators when CEOs of banks were looting banks in the name of credit growth. They remained deaf and dumb when corrupt bankers were humiliating senior officers and workers of banks in the name of merit oriented policy for promotions, transfers and recruitment. They maintained complete silent when politicians were exploiting banks in the name of revival of economy. They were sleeping when legal set up for recovery failed to recover money from defaulters even after lapse of two or three decades.

I am of strong view that health of PS banks have gone from bad to worse during last two decades only due to bad Human resource policy and due to worst execution of good policies. If one peeps into performance and appraisal reports of all officers of last two decades , it will become crystal clear that good officers have always been neglected in all promotion processes and bad officers who were master in flattery and bribery got one after other elevation. And now gang of bad officers is ruling the banks with unity. They unitedly protect bad officers and sideline really good officers similar to case of Mr. Khemka in Harayana .

As long as workers of any organization do not feel satisfaction after doing devoted duty, there is no chance of bank improving their health whatsoever may be the finding and suggestions of Nayak Panel. It is only in PS banks that 20 year or 30 years experienced good officers are rejected and brand new officers in higher scale are recruited directly to please top bosses and politicians. Juniors are ruling seniors  not because they are more intelligent and talented ( barring some exceptions) but because they used money and powerful bosses for getting quicker promotions and got success in getting new job in higher scales.

It is this dirty game of top bankers that health of banks have deteriorated during last  two decades whereas private banks have improved their health under similar and fully same external situations like global recession or natural calamities, or interest rate freedom or recruitment freedom or government policies or legal set up etc.

Officers of PS banks work to please and protect the self interest of their bosses whereas officers in private banks work for betterment and for protection of their organization.

Anger of investors, bank customers, bank staff and that of all concerned against government is on rise due to relentless rise in stressed assets and due to government failure in containing the same and in recovery of bad loan from defaulters. Before it becomes violent, government as usual set up a panel for suggesting alternate ways and switch over the responsibility of failure to another set of body and get rid of punitive action for their past mistakes. And panel is also manned by such persons who can submit reports as per whims and fancies of the officials who are behind all stories of scams, frauds, bad debts and all types of irregularities.

It is the habit of Government; first they exploit the government organization and government fund for self interest and then change the name of the scheme and name of regulators or merge the maligned schemed to some other schemes. In the past many small banks , big banks , rural bank or cooperative banks or chit funds have failed and then merged with some stronger entity to avoid the consequences of public anger against mismanagement and large scale fraudulent activities perpetuated by the management of the failed bank.

As long as officials and the persons who hold the key post in any organization are bad and ill-motivated, no power on earth can stop misuse and pilferage of government money and no power can ensure good health of any public sector undertaking or any department. When top officials in banks are bad, assets created by them will definitely be bad and no power on earth can stop rise in bad assets of these banks. Nothing is to change if rules for constitution of bank’s board are altered or stake of government is diluted to below 50% in PS banks.

This is why they , corrupt bankers in nexus with corrupt team of politicians and regulating officials either write off the bad loans or keep bad loan evergreen by fresh lending or restructure bad loans or sell the bad loans to ARC to clean the balance sheet. All efforts are to conceal evil works and bad assets .This is a usual phenomenon in banks and in all government offices dealing with finance and money. When a bank become weak or goes beyond control, it is merged with some other stronger banks. 

It is the Habit of the government not to cure the root cause of the disease but to make lame excuses for failures or to put carpet on the malady or carry out little surgical operation to befool innocent masses.

And finally flattery and bribery culture is the root cause behind all mismanagement and all scam stories . Weak and ineffective judiciary adds fuel to fire.