Budget 2021

Banking reforms to help in the long-run

Radhika Merwin BL Research Bureau | Updated on January 24, 2018

The change


Public sector banks were expecting large capital infusion from the Government, to help them meet Basel III requirements. Instead, the Finance Minister has set the ball rolling on reforms that can materially improve the governance in public sector banks. The proposal to set up a Bank Board Bureau is aimed at ushering in improved governance of public sector banks.


The background

The Centre has been meeting the capital needs of state-owned banks in the past and has infused about Rs 58,600 crore in the last four years (2011-14). After infusing Rs 14,000 crore in 2013-14, the Government was tight-fisted in 2014-15. The Centre infused Rs 6,990 crore into these banks in 2014-15. Along with reducing the amount it infuses, the Government has adopted a new criterion for selecting banks for capital infusion. Banks that are more efficient would be rewarded with additional capital — ones that have delivered above average returns in the last three years.


Considering that public sector banks need about Rs 2.4 lakh crore over the next four years by way of capital infusion, the meagre Rs 7,000 crore earmarked in the current Budget is a clear indication that the Centre will restrict infusion to better performing public sector banks.


While the Centre’s move to nudge inefficient banks to put their house in order and fend for themselves is indeed a step in the right direction, this would not be possible unless public sector banks can materially improve their efficiency. To facilitate this, some of the constraints, such as such as dual regulation, by the Finance Ministry and the RBI and board constitution, need to be addressed. The Government’s intention to reduce its stake to 52 per cent is a step in the right direction. But to kindle investor interest, there needs to be a change in the governance structure. The constitution of an independent Bank Boards Bureau (BBB), will bring in independent selection process for top bank officials. This will bring in a measure of accountability for the performance of the banks.


The verdict

This move, though a long-drawn one will impact all PSU banks positively. However, in the near term, banks that have very low capital ratios and weak asset quality will find it difficult to grow and meet their Basel II requirement. Central Bank, United Bank, IOB, Union Bank, Bank of India and Vijaya Bank are some of the banks that have Tier-I capital of less than 8 per cent and have not received capital infusion in 2014-15. These banks will be impacted negatively.​

Published on February 28, 2015

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