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The stock market euphoria after Finance Minister Arun Jaitley announced a seven-pronged strategy to revamp public-sector banks - christened Indradhanush (rainbow) - proved short-lived. One brokerage house after the other started doubting the real impact of the package. Mumbai-based Ambit Capital went to the extent of calling it old wine in a new bottle!
The disappointment was not misplaced. A detailed look at its key elements shows the package is long on hype but short on content.
The government claims to have taken a major leap forward by appointing non-executive chairman and managing director & CEO for several banks. This was long overdue. Bank of Baroda's top post was vacant for more than a year, while Canara Bank and Punjab National Bank were headless for close to a year.
One takeaway is that the response from the private sector for these leadership roles was lukewarm. Though the deadline for applications was extended and the age criterion was relaxed, big names from the private sector were missing from the list of the 50-odd applicants.
Only two banks got MD & CEO from the private sector: Canara Bank and Bank of Baroda. Rakesh Sharma, who was appointed to Canara Bank, spent 33 years in State Bank of India before joining Lakshmi Vilas Bank last year as its MD & CEO. Lakshmi Vilas Bank is a small private sector bank headquartered in Chennai, and has a total business of less than Rs 40,000 crore: about 5 per cent of Canara Bank's business of close to Rs 800,000 crore.
PS Jayakumar, who will run Bank of Baroda, was MD & CEO of Value and Budget Housing, a real estate developer, though he started his career with Citibank in 1986. The other three MD & CEOs that the government appointed were from public sector banks.
"We do not read the development of the new MD & CEOs recruited from the private sector, at Bank of Baroda and Canara Bank, agreeing to work on 'government salaries' as a positive development," said Ambit Capital in its report.
Two, the Bank Boards Bureau (BBB), which will now select the board members as well as the non-executive chairman of public sector banks, too looks like a halfway house. The concept of BBB was mooted by the high-powered committee headed by former Axis Bank chairman PJ Nayak.
The finance ministry may have accepted the nomenclature suggested by the Nayak report but it has deviated from its content. The Nayak committee had suggested that BBB must comprise former bankers only and nobody from the government or Reserve Bank of India.
However, the government has proposed the search committee of BBB would comprise the RBI governor, finance secretary and department of personnel and training secretary. Three members of BBB will be experts, of which two will be from the banking sector, according to the government's plan. The proposed structure of the BBB is exactly same as the present selection committee for bank CEOs.
The third area was capital. The government has increased its outlay from what was envisaged earlier and said that Rs 70,000 crore will be infused in public-sector banks over the next four years. At the same time, the banks need to raise Rs 110,000 crore from the market.
Most of these banks are trading at a discount to their book value and the government is in no mood to sell them cheap. If that is the case, it is not clear how these banks will raise the required amount. "In our view, just providing equity capital is not the solution to revive public-sector banks. Greater focus should be on efficient utilisation of capital," broking firm Nirmal Bang said in its report.
From the next financial year, the banks will need huge capital to meet the Basel-III norms that kick in from 2017-18, and much of it will have to be raised from the market. Investors' confidence will be crucial for the banks to raise their resource requirement.
At the same time, there was disappointment as there was no specific action plan in the revival package to tackle non-performing assets - an area that is of grave concern for investors.
Keeping controls
More important, the government has shown no intention to give up control - which is at the heart of the Nayak committee report. The committee suggested a three-phased transition with an independent BBB in the first phase, a bank investment company (BIC) in the second phase where most of BBB's powers will be transferred and finally in the third phase when all BIC powers will be transferred to bank boards.
Till now, there are no concrete steps which indicate that the government is planning to form a BIC, except for a budget statement saying BBB would be an interim step towards establishing a holding and investment company for banks. In the press conference to announce Indradhanush, the finance ministry said it was mulling to set up such an entity.
Also, there is absolutely no indication from the government that it will pare its stake in these banks below 51 per cent. Rather, the government has maintained that it wants to hold at least 52 per cent in the banks. "We need to move from government-owned banks to government-linked banks. Unless that happens, governance in public sector banks will not improve," says an expert.
Cutting stake below 51 per cent is crucial for giving a level playing field to public sector banks. As long as government stake is above 51 per cent, they will face several constraints like being exposed to enquiries from the Central Bureau of Investigation and Central Vigilance Commission, and providing information sought under the Right to Information. This also leads to divergence in compensation. And this explains the private sector bankers' reluctance to apply for the top job in public sector banks.
Time is running out, both for the government and the public sector banks.
