PSU banks' autonomy can be a reality

Lowering govt stake in PSU banks is a good step but autonomy to banks will be more prudent

Call it the need of the hour, a desperate move or smart governance, the decision of the finance ministry to allow  public sector banks to raise resources on their own is a step in the right direction. 

 

A tight fiscal position might have caused the finance ministry to say that it might not be in a position to allocate funds for recapitalisation in the coming Budget. In the Interim Budget, a provision of Rs 11,200 crore was made, which is unlikely to be raised in the final proposal. 

 

The ministry has asked the state-run lenders to meet their capital requirements by offloading government equity, hiving off non-core businesses and issuing bonds. 

 

By not recapitalising the public sector banks, the government is walking on the path suggested by PJ Nayak panel [Read here] which was set up to resolve the issue of rising bad loans in public sector banks. One of the biggest problems identified by the panel was government and political interference. 

 

Hiving off non-core businesses would mean a profit in the books of the banks which after paying taxes will be transferred to reserves as retained earnings. This forms part of the Tier 1 capital and thus there would be no change in the equity structure of the promoters. 

 

This will help the banks to free their blocked investments which along with the subsequent leverage will be available to grow their business.

 

Interestingly, banks have been given another novel way of raising funds. The government has given them an option to offload its own share, a kind of divestment in the bank. But the proceeds of the sale will then be ploughed back into the bank at prevailing market prices. By doing this, banks will get their necessary capital though there will be a slight addition to its capital base. The government's re-investment will come in at a premium and though the investment will be money neutral for the government, its stake (which was bought at par) will come down since the same money is now reinvested at the current market price. 

 

Another way of recapitalising available to the bank, which the government has surprisingly not pointed out, is by way of raising fresh capital through the preferential route, just as Yes Bank did while raising $500 million recently. Allowing banks to list their subsidiary is also a good way of raising capital, especially since some of them are holding profit-making subsidiaries like insurance and mutual funds ones. 

 

The new government has taken the right step by deciding to lower its stake but it will be more prudent if there is no interference in the operations of the banks. This according to the PJ Nayak report can come when the government's stake in all public sector banks are transferred to a holding company. This investment will be managed along the lines of a passive sovereign wealth fund aimed at ensuring professionalism. It is only then that PSU banks will be able to operate to their full potential.