Budget 2018: Recapitalisation Done, Time To Signal Banking Reforms

After announcing a big recapitalisation package for public banks, the government must now signal follow-up reforms

Representative Image.

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At the turn of the century, the then Indian finance minister Yashwant Sinha signalled a move towards banking sector reforms.

While presenting the Budget of 2000-01, Sinha said the government had decided to accept recommendations of the Narasimham Committee on Banking Sector Reforms.

Crucial among these was a decision to reduce the minimum government shareholding in nationalised banks to 33 percent. That was a time when banks were stressed, needed capital and the government did not have adequate fiscal room to support them.

That intent to reform state-owned banking, however, did not translate into action. And so, eighteen years later, Finance Minister Arun Jaitley may once again find himself spelling out a reform roadmap for these banks.

Having announced a Rs 2.11 lakh crore recapitalisation package for public sector banks this year, the government must now signal further reforms to improve the functioning of these banks, said Bimal Jalan, former governor of the Reserve Bank of India in a conversation with BloombergQuint. “We have to take measures to ensure the strength of these banks,” Jalan said while adding the most important thing to do is to give greater operational independence to bank managements.

What one needs to do is give management powers to the banks. For instance, if you have a bank in an urban area, their policy may be different from a bank which has branches in rural areas. Someone has to keep watch and that should be the bank and the board. The government’s job should be to keep them accountable and make sure they deliver the kind of services the country needs.

Bimal Jalan, Former Governor, Reserve Bank of India

The result has been a surge in bad loans, which now stand at Rs 8.4 lakh crore or over 10 percent of all banking system loans.

Bad loan ratios across public sector banks are much higher, forcing the Reserve Bank of India to place 11 of the 21 listed government lenders under the ‘Prompt Corrective Action’ framework.

Under the framework, strictures, including on lending, are placed on banks which have high bad loans, weak capital adequacy and low return on assets.

Is eventual privatisation the answer? Jalan doesn’t believe so.

If 60 percent of your workforce is in rural areas, then how can you depend on private banks to provide them services. Public sector banks still have a role to play.

Bimal Jalan, Former Governor, Reserve Bank of India

Granular Reform Over Bold Pronouncements

Arundhati Bhattacharya, former chairman of State Bank of India, also believes that the crucial reforms that need to be undertaken are in the areas of governance and policies around human resource management at public sector banks.

The government, while announcing the recapitalisation package, had said that the capital infusion would come together with reform of the banking sector to ensure appropriate use of the funds.

If the government can signal what reforms it has in mind, that would help, Bhattacharya told BloombergQuint. “Specifically, if these are in the areas of HR and further empowerment of the bank boards, that would be seen very positively by the market,” said Bhattacharya.

The government in April 2016 had set up the Banks Board Bureau (BBB) to help identify top management for public sector banks. The BBB was also intended to guide strategy at these banks and help them with capital raising options. It has so far not achieved much success. Banks, like the SBI, have also tried to push performance-linked incentive plans for its staff. This, too, has failed to take off.

Some of the largest areas (of reform) would be in the area of board empowerment and HR. Those things, if we can start working on, the rest can follow suit. But we definitely need a lot of work in the area of HR. This ranges from recruitment and training to processes and ensuring specialisation, which is something that public sector banks have lacked. Public sector banks have been generalists but in today’s day and age you need specialisation.

Arundhati Bhattacharya, Former Chairman, State Bank of India

When asked whether consolidation needs to be part of the reform roadmap, Bhattacharya said that banks would prefer to clean up their balance sheets before they focus on mergers.

Under Bhattacharya, SBI had finished merging with its associate banks. The success of that merger has prompted the government to push for more consolidation among public sector banks. The process of submitting consolidation plans, however, was left to the banks themselves. So far, no formal consolidation proposals have been made public.

(This was originally published on BloombergQuint and has been republished with permission)