Governance reforms needed in banks for consistency in performance, says Mundra

Reserve Bank of India Deputy Governor SS Mundra said in the absence of strong structural and governance reforms, consistency of banks’ performance would always remain susceptible to external and internal events.

His observation comes in the context of stressed advances in the banking system rising to 12 per cent as at June-end 2016 from 11.4 per cent as at March-end 2016 and profitability of banks, especially in the public sector, coming down.

The stressed advances (gross non-performing assets + restructured standard advances) situation is acute in the case of public sector banks (PSBs).

Their stressed advances rose to 15.4 per cent as at June-end 2016 as against 14.4 per cent as at March-end 2015.

Year-on-year, provisions for non-performing assets (NPAs) for the banking system jumped 131 per cent to ₹1,70,630 crore during the year ended March 31, 2016, as against ₹73,887 crore in March 2015.

Within the banking ecosystem, NPA provisioning in the case of PSBs soared 150 per cent to ₹1,44,608 crore (from ₹57,842 crore).

Net profit of all scheduled commercial banks was collectively down to ₹32,285 crore in FY16 as against ₹79,465 crore in the previous year. PSBs collectively reported a net loss of ₹20,006 crore (₹30,869 crore in the previous year).

Mundra said (governance) reforms in private sector banks have to be focussed on misaligned incentives/compensations. He added that the agenda for PSBs is much larger.

However, the immediate and overriding priority is to complete the clean-up of banks’ balance sheets which is under way. The resultant provisioning needs (on account of balance sheet clean-up) coupled with meeting Basel-III norms/migration to International Financial Reporting Standards and to capture due market share in growth funding would entail recapitalisation of most of these banks, said the Deputy Governor.

“Seeking this capital externally at this stage may be difficult as also value eroding for the majority owner,” he said.

Mundra felt that the process of bestowing greater “Governance Autonomy” on PSBs has to continue.

The Deputy Governor elaborated that “government ownership of these banks has resulted in crucial stability and resilience in trying times. Immediate roadmap should, therefore, be towards complete managerial autonomy”.

“If government remains the largest shareholder, not necessarily majority shareholder, it still serves the intended purpose. At the same time, it releases these banks from multi-institutional oversights and overlapping controls.”

Managerial control coupled with the government remaining the largest shareholder, not necessarily majority shareholder autonomy, will lead to HR autonomy.

“Banks would be able to move towards competitive compensation, flexible hiring and move away from the “collective bargaining”- just to quote a few from many possible outcomes,” explained Mundra.

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