Set up sovereign fund type of holding co. for PSU banks to meet Basel-III norms of Rs 3 lakh cr recapitalisation: ASSOCHAM to FM

With public sector banks facing a gigantic requirement of Rs 2.40-3 lakh crore by way of equity to meet the Basel-III norms by 2018 and the government's inability to raise such resources as their principal shareholders, the ASSOCHAM has written to the Finance Minister Mr Arun Jaitley suggesting formation of Bank investment Company (BIC) which will act as a holding company for the PSBs.

A day before meeting of the Finance Minister with heads of PSBs, ASSOCHAM has recommended BIC as a core investment holding company under MoF for holding equity shares in PSBs, which can be permitted to raise resources from the capital markets for future capitalization. The BIC will be akin to a sovereign fund and will be able to tap the global financial markets, which is a crying need since against such large requirements; the government was able to provide only Rs 11,200 crore for recapitalization of the PSBs.

 

This model has been successfully implemented in Singapore and UK, will enable empowerment of PSU banks by transferring accountability & responsibility from the government to the BIC and offer a level playing field to PSBs in matters of employee skill development.

Bring down the government ownership in PSU banks. This key step needs to be fully complemented by targeting to reduce government ownership to 26% (as for new private sector banks) where the government will continue to be the main promoter, ASSOCHAM President and a renowned banker, Mr Rana Kapoor said. In the first stage, the government can garner Rs 90,000 crore just by reducing its stake in 24 PSBs to 52 per cent before going in for ambitious target of bringing down its equity to 26 per cent.

He said, many leading PSBs have in past invested in prime real estate as also made financial investment in rating agencies, exchanges, allied business like home finance, insurance etc. PSBs could utilize the current uptick in the capital markets to divest these and raise incremental capital. Banks should not be using scarce capital resources for promoting capital intensive businesses like insurance and theses activities can be 'restructured' under the BIC.

The chamber has recommended that Risk management in PSBs needs to get overhauled by aligning risk management processes with the overall business relationship strategy with a diagnostic & perspective approach, defining roles and responsibilities and establishing accountability. The efficient use of MIS and technology to drive a RAROC based risk management framework which can help to improve oversight, decision making by removing subjectivity and drive cross sell.

NPA monitoring needs to go hand in hand with Exit Monitoring through red flagging and use of Early Warning Signals. PSBs should also constitute specialized cross functional terms which include business, risk managers and legal experts for recovery management.

Currently private sector banks spend about 2% of their revenue on technology, PSBs spend less than half of this. A well thought through IT strategy can help the PSBs migrate from core banking to door-step banking to Virtual and Digital Banking. Use of IT for centralized operations, efficient use of server space including cloud computing & virtualization etc. can potentially reduce operational cost by 12-15%.

Implementing lean work-flow systems to centralize processing in back-office centers will not only reduce operating & real rentals & utility cost, but will also free up space from braches and improve the customer sales and service experience. This will also enable PSBs to outsource some of the non-core activities, thereby reducing the HR burden.

The government may also look at introducing ESOP schemes at PSBs to align value creation interest of shareholders and employees. This will also pave way to hire laterally for key specialized positions to ensure influx of best practices.

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