To save public sector banks focus on structural changes, not recapitalisation

Every few years, public sector banks are hit with a tidal wave of loans gone bad; the problem sectors change, the outcome remains the same. There has to be a new approach

opinion Updated: Oct 18, 2017 14:27 IST
PSU banks,Public sector banks,Oriental Bank of Commerce
Giving capital to the weaker PSU banks would be throwing good money after bad (Representative Photo)(Reuters)

Recently, the Oriental Bank of Commerce became the seventh PSU bank to be brought under Prompt Corrective Action by the Reserve Bank of India. In simple terms, this means that the bank’s operations are severely restricted and it is waiting to be taken over by a stronger bank.

The public sector banking is a mess. It is the reason behind the tardy credit growth of the entire sector which many believe could be a key contributor to the current economic slowdown. When credit growth comes to a standstill for 70% of a country’s banking sector, it deserves the prime minister’s personal attention.

Market forces are inducing a gradual transition — from the public to private sector. Every quarter, private sector banks eat away at the market share of their public sector counterparts and over the next two decades it is likely that the 70:30 market share split between public and private sector banks will turn the other way round.

While this may be in keeping with the rules of the marketplace — survival of the fittest — the ensuing period may be one of a very painful transition for the economy, as we could be witnessing today. As a nation we cannot afford it. Public sector banks have to be made competitive again and no, recapitalisation — while currently required — is not the medium term solution. It is merely kicking the ball into the long grass.

The problem lies at the core. Every few years, public sector banks are hit with a tidal wave of loans gone bad; the problem sectors change, the outcome remains the same. There has to be a new approach.

Successful banks can often trace their ascent back to the quality of top management, particularly the CEO. No one says it openly, but this is a major problem area for PSU banks. The top managements of PSU banks are simply not comparable to their counterparts in the private sector. The reasons are easy to spot. First, management compensation in the public sector is poor and that prevents lateral hiring at the top level from the private sector. The Banks Board Bureau (BBB) was set up to resolve this problem, but earlier this year the BBB chief HN Sinor resigned in frustration, before being persuaded to retract.

The problem is compounded by the ecosystem that surrounds PSU banks. Isn’t it naive to believe that poorly paid PSU bank managements have never had moral lapses while handing out loans worth thousands of crores? It is also an open secret that politicians have always enjoyed enormous influence on directing loan sanctions from nationalised banks. PSU banks need stronger boards that can spot these misdemeanours and prevent them. One look at the board of HDFC bank and any large PSU bank will demonstrate the difference. These issues are structural.

The government is perhaps aware of it, which is why it has not hastened to recapitalise banks immediately. Giving capital to the weaker PSU banks would be throwing good money after bad. In the current economic environment, they will quickly make more bad assets (NPAs) of the new capital. The way around it could be to issue recapitalisation bonds only to the top six PSU banks and persuade them to sell their non-core assets within a stipulated timeframe. These banks have a tough time being just banks, they don’t need to harbour delusional ambitions of being financial conglomerates. Since banks cannot be allowed to die, unlike other corporate entities, the weaker banks will have to be taken over by the stronger ones.

In the medium term, along with the NPA clean-up process which is underway, the structural issues will need to be addressed. Else, we will clean up this mess and be presented with another in the next economic down cycle. Leopards don’t change their spots, after all.

Finally, it boils down to people. The example of RBL buttresses this point. Till 2010, Ratnakar Bank was a laid-back old generation bank. In July of that year, ex Bank of America stalwart, Vishwavir Ahuja took over as CEO. He was roped in with a generous employee stock ownership plan (ESOP). Over the last seven years, RBL, as it is called now, has seen its deposits and profits jump 15 times. Ahuja’s own esop holding is worth around Rs 500 crore today. A clear win-win for all parties concerned. There may be a lesson in this for PSU banks.

Udayan Mukherjee in consulting editor, CNBC TV18

The views expressed are personal

First Published: Oct 18, 2017 14:27 IST