Banking on autonomy

Considering that the Centre has been routinely meeting the capital needs of state-owned banks in the past, its decision to infuse ₹6,990 crore into them this year would appear to be business as usual, but for its tightfistedness. ₹58,600 crore has been infused over the last four years (2011-14), with ₹14,000 crore in the last fiscal alone, into 20 public sector banks. This time, the amount is down to half the budgeted figure, and only nine banks will gain from recapitalisation. Given the lack of fiscal elbow room, the Centre’s decision to spend only half the ₹11,200 crore earmarked for recapitalisation in the Interim Budget isn’t surprising. What is striking, though, is the shift in the Centre’s criterion for selecting banks for infusion. Until last year, it was need-based: banks in dire need of capital to grow and meet their regulatory requirements got the money. Now, the Centre has adopted a new criterion — only banks that are more ‘efficient’, or have delivered above average returns over the last three years, will be rewarded with additional capital.

The move to nudge inefficient banks to put their house in order and fend for themselves is a step in the right direction, albeit long delayed. The sharp fall in profitability and stretched capital of state-owned banks can no longer be ignored. Bad loans have ballooned in the last three years, a symptom of lax prudential norms. Alarmingly, December quarter results indicate more pain ahead. This would have increased the outlays on recapitalisation of PSBs over the next couple of years. Against this backdrop, the Centre’s move to consider the Return on Assets (RoA) and return on equity to gauge efficiency is sound. Both these ratios measure how efficiently a bank manages its asset base or equity. Today, private banks average an RoA of about three times that of public sector banks. Asking PSBs to deliver returns on a par with their peer set is neither onerous nor unfair.

But that cannot be the end of the story. To materially improve PSB returns and efficiency, the Centre will have to hasten reforms to materially improve governance in PSU banks. External constraints, such as dual regulation, by the finance ministry and the Reserve Bank of India, board constitution, widening compensation differences with private sector banks, and so on need to be dealt with. For starters, there has to be transparency in the way PSU bank chiefs are selected; also, bank managements need greater autonomy in functioning. Reducing the government’s stake can be the first step towards creating a conducive environment for these banks to compete. But investor appetite can only be kindled if there is a change in the governance structure and confidence that profitability will improve. This will not happen unless the Centre creates a genuinely level playing field for the banks it owns.

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