There seems to be consensus that NPA problems of Public Sector Banks (PSBs) are much bigger than what was initially thought. Government is finding it difficult to recapitalise them to comply with Basel norms because of lack of resources in its kitty.

 

 

There is always a limitation to divert taxpayers’ money for this purpose as we have a very low tax paying population.

 

There is a reason to believe that instead of addressing the mess of PSBs by attacking the root cause of the stress of PSBs Government is pursuing the mergers of PSBs as knee jerk reaction. It may solve the issue temporarily but there is no surety that the problem may not recur again. The NPA and other issues are symptoms of the problems but the real issue lies in the governance of these PSBs which requires urgent attention of Government.

 

1) The proponents of amalgamation or merger of PSBs and creation of large giant PSBs make us believe that this will solve all problems plaguing the PSBs. Unfortunately these advocates of merger overlook the fact that mere size is not the answer otherwise Lehman Brothers, Citibank and Barings Bank would never have failed. Ironically on the one hand creation of large banks is justified and on the another hand tiny payment banks, small finance banks and postal banks are being encouraged. The country cannot afford this confusion when we are entering into an era of financial inclusion by offering banking facilities to all and marching to bring in entire economy into formal sector.

2) PSBs are facing lot of challenges today. However mounting and ever rising NPAs have threatened their very existence. The economic recession during last decade is attributed to this situation but political patronage to large defaulters, not so stringent recovery infrastructure and dilution of prescribed norms while sanctioning these loans had played a major role in worsening the situation.

 

It is bitter truth that more than 70 per cent of present NPAs are from large corporate whose most of the loans are sanctioned at top management level or at board level and the appointment to boards are directly made or with the concurrence of the Government.

 

3) It will be injustice on present Government to say that nothing has been done to rectify the situation but it must be humbly stated that the more effective measures should have been taken considering the deep rooted problem. Hence, it is very unfortunate that instead of addressing these issues merger of PSBs is advocated as panacea for all the problems of PSBs.

 

4) It may be recalled that the P J Nayak Committee was formed in May 2014 to review governance of boards of banks in India which suggested to form an independent ‘Banks Board Bureau’ (BBB).

 

Accordingly on February 28, 2016, the Government formed ‘The Banks Board Bureau’ (BBB) under the chairmanship of Vinod Rai, Former CAG of India which started functioning from April 1, 2016 as an autonomous recommendatory body to help prepare the banks in the public sector universe to take on the competition, have the ability to appropriately manage and price risk across business cycles, develop resilience to generate internal capital and have the capacity to generate external capital warding off the moral hazard in counting on the scarce budgetary resources of tax payers.

 

The Bureau is also entrusted with the PSBs to help build capacity to attract, retain and nurture both talent and technology. The Bureau is also entrusted to have a fully empowered board in each and every PSB.

 

5) At present BBB is headed by Bhanu Pratap Sharma, Former Secretary, Department of Personnel and Training, Government of India (GOI). Rajiv Kumar, Secretary, Department of Financial Services, GOI and Seema Bahuguna, Secretary, Department of Public Enterprises, GOI, N S Vishwanathan, Deputy Governor, RBI are ex-officio members. Vedika Bhandarkar, former Vice-Chairman of Credit Suisse, Panja Pradeep Kumar, former MD of SBI, Pradip Panalal Shah, Founder MD of CRISIL are part-time members. Some observers feel that GOI continues to exercise its authority over the PSBs through BBB and very little has changed from what it was earlier on credit, expansion and even appointments of chairmen have to go through the Appointments Committee of the Cabinet. Apart from objective criticism it may be humbly stated that the performance of the Bureau in this regard could not fulfil the expectations of the stakeholders.

 

There is still ample scope to improve the appointment process not only at the board level but down the line also.

6) The cursory look at the composition of BBB suggests that bureaucracy is not much enthusiastic in losing their grip over PSBs. The author of this article has great respect for talent and administrative skills of Indian bureaucracy but it will not be out of place to draw attention to the observations of the P J Nayak Committee when it suggested that “Government officers and regulators may not possess the skills to appoint the top management of commercial banks. Banking is a very specialised activity and the management needs to combine strategic foresight with a good commercial knowledge of sectors to lend to, prudent risk management and human resources skills.”

 

7) Even though the role of private sector banks cannot be underestimated it is well established fact that PSBs play a great role in socio economic development of the country. However lack of proper governance at the top level of PSBs is the main cause of mounting NPAs and deteriorating situation of PSBs which penalises depositors by not getting proper returns on their deposits and quality services at affordable prices. Borrowers are also deprived of adequate and timely credit at competitive rates. Moreover tax payers also feel cheated as their hard earned money is wasted in recapitalising ailing PSBs.

 

8) With the rising financial literacy during last couple of years people have started feeling that there is an urgent need of healthy banking system for socio economic development of the country. It will not be appropriate to ignore these sentiments for too long in any vibrant democracy like ours. Let us hope that Government will take urgent steps to strengthen the PSBs by professionalising them.