In the post-crisis period, with decelerating economic growth, high inflation, and the domestic financial market volatility, the public sector banks (PSBs), which account for more than 70% of the banking market share, have seen lower profits and deterioration in asset quality, particularly in the infra and related sectors.
Many PSBs have slammed the brakes on lending to these sectors. However, profitability and asset quality are at best symptoms. The PSBs are in dire need of structural transformations to remedy the root causes of their ailments.
The PSBs will need Rs 2.4–3 lakh crore of equity capital to meet regulatory requirements under BASEL III, a global, voluntary regulatory standard on bank capital adequacy, stress testing and market liquidity risk, by 2018. The government, which is moving towards consolidation, will not have the wherewithal to meet these requirements. The budget had provisioned Rs 11,200 crore for recapitalising PSBs in this fiscal. Only a handful of the larger players can depend on equity markets to raise capital. Therefore, a bank investment company could be set up as a core investment holding company under the ministry of finance to hold equity shares in PSBs, which can be permitted to raise resources from the capital markets for future capitalisation.
Recently, Union finance minister Arun Jaitley spoke about the government’s plans to bring down its stake in PSBs to 52%. Estimates suggest that the government will be able to garner up to Rs 90,000 crore by cutting its stake in the 24 PSBs, which will significantly reduce the fiscal demand. This needs to be complemented by targeting to reduce the government’s ownership to 26% (as for new private sector banks) where it will continue to be the main promoter.
Many leading PSBs have in the past invested in real estate and also made investments in rating agencies, exchanges and allied businesses like home finance and insurance. The PSBs could utilise the current uptick in the capital markets to divest these and raise incremental capital.
Banking is about trust. The recommendations of the PJ Nayak Committee, calling for more autonomy and professionalism in PSBs, as well as the splitting up of the post of CMD into a non-executive chairman, an MD and CEO, will go a long way towards transforming governance practices in the sector. A minimum tenure of three-to-five years for the top management and their second and third line leadership, as also performance-linked compensation will ensure continuity, accountability and results.
Risk management in PSBs needs to be overhauled by aligning risk management processes with the business relationship strategy with a diagnostic and prescriptive approach, clearly defining the roles and responsibilities and establishing accountability. Efficient use of management information systems and technology can help improve oversight, improve decision making by removing subjectivity and drive cross-sell. Currently, while private banks spend about 2% of their revenue on technology, PSBs spend less than half of this.
A well-thought-out IT strategy can help the PSBs migrate from core banking to doorstep banking to virtual and digital banking. In PSBs, 60-65% of the staff is deployed in back-office activities in branches. Implementing lean work-flow systems to centralise processing in back-office centres will not only reduce operating
and real rentals and utility costs, but will also free up space from branches and improve customer sales. This will also enable PSBs to outsource some of the non-
core activities, thereby reducing the HR burden.
With the economic cycle now at a turning point, it is imperative for policymakers to muster strong political and regulatory will to implement the foregoing recommendations so as to achieve a sustainable revival in economic growth. If the PSBs are to galvanise the huge opportunity that exists for the Indian banking sector, the government has its responsibilities well-defined.
Rana Kapoor is president, ASSOCHAM, MD and CEO, YES BANK.
The views expressed by the author are personal.