Smoke and mirrors

An autonomy package for public sector banks has been announced, and the stock market appears to have taken it at face value, pushing up the shares of public sector banks.

The government talks about "providing public sector banks with a level playing field so as to compete effectively with the private sector banks".

Banks will now be free to pursue new lines of business and exit unprofitable lines, they will be allowed to close/merge unviable branches, acquire banks abroad and open overseas offices, decide all human resource issues within their organisations, prescribe their own standards for categorisation of branches, lay down an accountability policy for their staff, and go on visits abroad.

How much of a difference will all this make? Allowing banks to get into different lines of business is fine, but the government hasn't been preventing them from getting into mutual funds, insurance, investment banking and so on.

They've also been opening overseas branches quite freely""SBI recently made a small overseas acquisition. There's already a policy on the merger of branches in cities, and would the government really permit banks to close down rural branches in under-banked areas?

Would it, as the owner of these banks, not offer an opinion about their proposed mergers and acquisitions""and why should it not, since these are matters on which shareholders/owners are supposed to have an opinion? Would the "policy of accountability and responsibility for bank officials" let public sector bankers out of the clutches of the investigative agencies?

A closer look at the proposal on HR reform shows that banks will now be able to offer higher pay to specialist officers, and they can offer "differential pay" within a particular grade.

Specialist personnel have always been paid higher salaries""junior officials at SBI Capital Markets, for instance, may earn more than their bosses who are on deputation from the parent organisation.

And the difference in pay within a particular grade will amount to a couple of thousand rupees per month. Even that change may not happen, because the unions may oppose it.

The industry-wide collective bargaining structure ensures that even the best banks can only pay what the weakest can afford. And the unions will fight tooth and nail to ensure that industry-wide bargaining remains.

The point is simple""unless public sector banks are allowed to pay market wages and have the freedom to get rid of unwanted employees, they will be at a disadvantage compared to foreign and the new private sector banks.

To be sure, not all private sector banks have been successful. But the best among the public sector banks are hobbled by these restrictions.

That's why, even after the rise in prices following the announcement of the autonomy measures, the valuations of even the best public sector bank stocks are well below those of their counterparts in the private sector.

Among other things, the stock market must be aware of the autonomy promises made in the past to the "navratnas" of the public sector.