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Indradhanush, the seven-point reform agenda announced by the government to revive public sector banks, has received mixed response, depending on who you are talking to. While analysts have called the step positive, bankers are not enthused by the move.
According to Edelweiss, Indradhanush can bring in structural changes in the the public sector banking space, though it may not necessarily reflect in earnings in the near term.
On the other hand, broking firm Quant says if the current opportunity is utilised well, it will provide ample growth possibilities along with acceleration in return ratios for PSU banks. This would gradually narrow down valuation discount for PSU banks vis-a-vis private banks, says a Quant report.
On the other hand, broking firm Quant says if the current opportunity is utilised well, it will provide ample growth possibilities along with acceleration in return ratios for PSU banks. This would gradually narrow down valuation discount for PSU banks vis-a-vis private banks, says a Quant report.
PSU banking stocks performed well on Monday - the first day of trading after the measures were announced over the weekend. But senior bank officials say as long as the banks remain under the government’s control and bureaucrats micro-manage the operations, little will change in the space.
Let’s look at each of the seven measures announced by the government and assess them from both the viewpoints.
Appointments: The government announced the appointment of MDs, CEOs and non-executive chairman of five banks. Markets are glad that for the first time a transparent and competitive process was followed to fill these seats. But bankers and industry observers say that going forward, these seats might again see political appointees. Further, the faith in private sector bankers over public sector ones might be detrimental to the morale of the bank employees. However, Finance Services Secretary Hasmukh Adhia has assured that for the 16 remaining banks, the govt will not pool in people from the private sector.
Bank Board Bureau (BBB): It will be functional from April 2016 and it will constitute a chairman and six personnel and it will replace the Appointments Board that currently appoints full?time directors and non?executive chairmen of PSBs. Three appointees in the BBB will be government officials and two will be from the banking sector. This board will decide future appointments of bank heads. Bankers fear that the BBB might again tilt in favour of government nominees, which can add a political shade to appointments in the future.
Capital: Finally, banks were allocated much-needed capital by the government. Analysts at Edelweiss say capital infusion is broadly in the range of 4-5% of existing net-worth (except for IDBI, IOB where it is above 10%). Banks which didn’t get capital will get preference in the next round. As has been the case in the past, the government has capitalised the banks just enough to meet the statutory norms. However, Adhia in another interview pointed out that all banks don't need to grow at 12%. Smaller banks can decide to have a modest lending growth rate at 6-7%. More efficient bigger banks can grow at 14-15% and smaller banks can consolidate their position for some time. The government has clarified its focus areas; now, it is up to the market to identify PSU bank stocks that will give handsome returns.
De-stressing: The government has announced various measures to focus on resolutions by involving stakeholders (Project Monitoring Group, Cabinet Secretariat, respective ministries) and strengthening ARCs among others. But a lot of action is needed from the government’s end in order to deal with the NPA mess. For example, power, steel and infrastructure account for nearly 40% of toxic loans on the banks' books. The government involvement is there in power and infrastructure loans in varying extent. Though baby steps have been taken in clearing the issues, there is still a lot of distance to be covered. But it is the steel sector which is worrisome. Finance Minister Arun Jaitley, while discussing the NPA issue in the steel sector, said it is an external matter. With nearly Rs 5 lakh crore of banking loans riding on the sector, the government cannot just wish away the problem. Given the scenario in China, the problem is here to stay for a long time.
Empowerment: Focus on banks’ autonomy with no government interference. While analysts have applauded it, no government interference is easier said than done. One draught year is enough to test government’s resolve.
Framework of Accountability: A new framework of key performance indicators (KPIs) to be measured for incentives was announced. KPI-linked performance bonus for MDs & CEOs and ESOPs for top management is proposed. This is a positive step from the point of market and banks as the focus will now shift to profitability rather than just loan growth and top line related parameters. However, a lot will depend on how distant the government is willing to stay away from the banks. Adhia reiterated Jaitley’s point that they are encouraged by the Jan Dhan scheme and similar schemes might be launched going forward, especially in the health insurance sector. Public sector banks have been complaining in hushed voice on the cost of having a zero balance account. If the top management are going to be measured on the profitability parameters, the bankers need to be given complete freedom.
Governance Reforms: Continuous dialogue with banks through Gyan Sangam is a positive initiative taken by the government. The next such meeting is scheduled for January 14-16, 2016 and such regular review meetings with banks, regulator and government would clear the air faster.
While the government has taken a number of positive steps which have gone down well with the market, people at the operational level are not sure if it will work.
