Govt unshackles PSU banks

PSU banks can now enter new business lines without government approval.

The government today unveiled a new autonomy package for public sector banks, removing a slew of stifling controls. State-owned banks now need not seek the government's permission for acquisitions, entering or exiting businesses, setting up overseas offices or merger of unviable branches.

This means banks like the State Bank of India, which is acquiring 51 per cent stake in the Mauritius-based Indian Ocean International Bank, will not have to wait for government clearance to go ahead with the deal.

Senior finance ministry officials said the government's role would hitherto be limited to clearing public offers in its role as the majority shareholder, appointment of chairmen and managing directors, executive directors and non-official directors.

"In the wake of the liberalisation in the Indian economy, the steps will create a level-playing field for public sector banks," said an official.

While banks can enter new business lines without government approval, the new activities will be limited to those prescribed in the Banking Regulation Act. "The new business should make sense in terms of synergy with the business. It cannot be a completely unrelated activity," said the official.

The government is also in the process of fine-tuning the appointment process and will ensure chairmen and executive directors have a tenure of 3-5 years. In addition, a panel of non-official directors and shareholder directors will also be prepared.

Government approval for the merger of nationalised banks is, however, a gray area. The government will need to amend the law to allow for a merger of a bank with a financial institution.

The new norms also provide banks with flexibility in all human resource issues. It also aims to reduce the risk of nationalised bank staff facing vigilance or CBI inquiries as the government has asked the banks to lay down a policy of accountability and responsibility, which recognises bona fide errors at the time of decision-making.

Nationalised bank brass will no longer have to wait for government clearance for undertaking foreign trips to interact with investors and depositors.

Further autonomy has been proposed for banks that registered net profits for three years till March 31, 2004, had a capital adequacy ratio in excess of 9 per cent and whose net non-performing assets were under 4 per cent.

Apart from a handful of banks like Punjab & Sind Bank, Dena Bank and United Bank of India, the others would have the flexibility to offer differential pay to its staff and can also offer a different remuneration package for specialised staff.

The move is aimed at rewarding performers, while at the same time attracting the best talent to the public sector banks.

These banks will also have the freedom to create additional posts at the middle management level, besides having the flexibility to contribute more liberally to the staff welfare fund.