Time is ripe to set PSU banks free of government intervention

If there is one point that comes out clearly from PJ Nayak's panel report on public sector banks, it is about taking the government out of government banks in all forms. Though he has not said it in so many words, the pointers indicate that the problem of toxic assets in these government owned banks have risen due to government interference. 

 

RBI had formed a panel led by former Axis Bank Chairman P J Nayak to look for a solution for the rising bad loans in the state controlled banks. Non-performing assets (NPA) touched Rs 2.43 trillion for 40 listed banks, a rise of 36 per cent over its previous year. These could have been much higher had a large chunk of loans not been restructured. Loans restructured in the banking sector is Rs 5-6 trillion. These figures do not include those infrastructure loans that have gone bad due to delay in clearances. 

 

It is an open secret that most of the bad loans have been pushed upon public sector banks by government and politicians. An independent panel has only reiterated what RBI has always articulated on such politically sensitive issues. 

Though the panel has identified the problem, some of the solutions will be hard if not impossible to implement. First is the suggestion of privatisation of the banks. The employee unions were up in arms when computerisation was announced, privatisation would make them go berserk. Merging banks and making them stronger is a plausible option that can go down well with the unions.

 

But these banks can be run as private sector banks without actually bearing the tag. In cities at least, most of these banks have undergone a serious change. Employees are more aggressive in pushing new products and have deposit garnering targets, just the way private sector banks operates. Unfortunately, they are not paid as well nor do they enjoy the incentives of a private sector player. Combining competitive salaries, personal growth and job security that comes with a public sector bank can work wonders on the talented pool of employees in these banks. 

 

The panel goes on to suggest that public sector banks be run under a new governance structure in order to compete successfully and avoid excessive dependence on government recapitalisation. In order to ensure a arms-length approach the panel has suggested that government should transfer all their stake and power to a separate entity to be known as bank investment company (BIC). 

 

However, this is easier said than done. Politicians have been known to use public sector banks to ensure their constituents are 'provided' for. Further, they would want these banks to finance some non-bankable projects in their constituencies. This phenomenon is true as much for the local politicians as for those sitting in Delhi. 

 

Under the garb of social responsibility and greater good for all, public sector banks are compelled to fund projects, which no private sector or financial institution would like to touch. Removal of such hindrances will go a long way in improving the health of public sector banks. 

 

Complete operational freedom and fixing of responsibilities down to the clerk level is a need of the hour for public sector banks. This is what privatisation is all about. 

 

Perhaps, this is the best time to accept the principles of the panel's recommendations. A new government can set the house in order as it will have five years to work with the banks. The government will need the help of these banks to ensure a healthy economic environment. It is time they give them their freedom.