Will the promised reforms at public sector banks kick off?

Aside from restoring the confidence of depositors, the government has been facing an uphill task of reviving lending activity. If PSBs, that constitute over three-fourth of the credit in the sector, have to prep the pitch for the next leg of lending, then addressing their capital and governance issues is critical.

The Budget in that sense struck all the right notes, promising governance reforms, transparency and greater professionalism and introducing major reforms in recruitment. But given that the Centre has been talking about reforms in PSBs for a while now, how these proposals are executed will be important.

Bank Boards Bureau

In the 2015-16 Budget, the Centre had proposed the constitution of Bank Boards Bureau (BBB) to usher in an independent selection process for top bank officials. This proved a non-starter. Also, nudging PSBs to raise money from the capital marketis not a new idea.

The question is: Will PSBs be able to kindle investor interest to bring in capital? And, is the Centre ready to let go of its stake in these banks, which they often call upon to meet their social and developmental objectives?

Till about three to four years back, the proposed recapitalisation figure was keenly awaited in the Budget. But the Centre’s mega bank recap plan in FY18had eased the drama a bit. This was not because the recap helped strengthen banks’ balance sheet or revive lending, but because banks and market players drew comfort from the massive recap assurance.

The Centre, too, drawing comfort from issuing recapitalisation bonds, has been magnanimous. The ₹2.7-lakh crore infused into PSBs between FY18 and FY20 has been through the issue of recapitalisation bonds.Essentially, the Centre borrows from banks to pump capital back into them (hence, not counted under fiscal deficit calculation). This has led to several issues. One, despite the huge amount of capital infused, persisting slippages and losses continue to eat into capital of many PSBs. Two, the massive capital infusion has led to the government stake in many PSBs shooting up to over 90 per cent. This has put the Centre in a peculiar position, limiting capital infusion in future.

Interestingly, the Budget this time around has not set aside any money for recap in FY21. Either the Centre is confident of PSBs (after the big bank merger) fending for themselves or it is banking on them to raise money from the market. Given the dismal state of affairs at most public sector banks, both seem a herculean task. PSBs have been trading at less than their book value over the past four to five years (0.4-0.6 times book) as against robust valuations of 2-4 times for private banks.

Hence, if investors did find value in PSBs, then these banks would have raised money from the market long ago, rather than knocking on their benefactor’ door.

Overhauling governance at PSBs drastically is critical to kindle investor interest.

The Centre now proposes to sell its entire stake in IDBI Bank. But with the bank continuing to report dismal performance, will investors take the bait? The bank’s GNPA stood at a steep 29 per cent in September. Its Tier I capital that slipped to abysmal 6 per cent in June climbed up to 9.5 per cent, thanks to the government’s ₹4,557 crore and LIC’s ₹4,743-crore capital infusion.

LIC, which acquired a controlling 51 per cent stake in IDBI Bank, has already seen its investment erode sharply – the insurer had been allotted shares in the bank at a price of 60-61 per share (current market price is ₹37).

Will retail and institutional investors be ready to take such a blow?