Are PSU banks’ NPA woes a good crisis gone to waste?


“Never let a good crisis go to waste,” Winston Churchill once said after the Second World War. He was referring to the crisis created in the wake of the war and how the conditions that arose from it made possible the formation of the United Nations.

India too followed that piece of advice after the 1991 foreign exchange crisis, chopping down a bunch of shackling regulations in order to create a more efficient economy. But unfortunately, the country appears to have let the recent NPA crisis go to waste. That’s a conclusion many have drawn from last week’s announcement of a rather large amount of the recapitalisation bonds going to some of the weakest banks.

The overarching feeling among policy watchers and the lay citizen was one of confusion about where the reform was if the weakest banks are propped up with taxpayer money, and at the expense of more worthwhile causes like education, health and farm distress.

Personally, I don’t fault the government for infusing capital in the weakest banks. Banks are special; they are leveraged institutions and have to be adequately capitalised as long as they are in business. If anything, the government was guilty of having acted dangerously late, with too many irresponsible, misleading WhatsApp messages doubting the safety of public sector banks. These messages could well have sparked a run on the banks, resulting in more unwarranted losses.

That said, the criticism that the crisis has not been used to reform the banks still remains. Yes, the secretary of the department of financial services, Rajeev Kumar, did announce some useful changes. He said that henceforth-
• Not more than 25 percent of a bank’s loans should be exposed to corporates.
• All loans above Rs 250 crore will invite specialised monitoring.
• If any of the covenants of a loan sanction are breached, that will be shared across the consortium of lenders.
• There will be a separate stressed asset vertical in each of bank for timely recovery.
• To be part of a loan consortium, banks will need to commit at least 10 percent of the total amount.

While these rules are useful, they are not reforms. They don’t address the core problem of a shareholder who confuses his other goals with that of the PSBs.

The DFS secretary’s next goal will clarify what I mean. Mr Kumar said the government has also asked all banks to re-orient lending towards small and medium enterprises. He went on to say that a large part of the Rs 5 lakh crore in incremental lending capacity created by the recapitalisation package should be utilised to lend to SMEs, and that the next tranche of capital will be allocated depending on how these goals are achieved.

Here then is the next set of questions – Will banks be given targets for SME loans? Is it a coincidence that this SME target is being imposed in the last year of the government’s term, a term that has been criticised for not creating enough jobs? And the more fundamental question – Is the government not imposing its goals as a sovereign on commercial entities that it only partly owns and which have to compete with other banks that don’t have such disadvantages?

There is a very good chance that these PSBs could be forced to reach SME targets, which will come to roost after a few years in the form of a fresh wave of NPAs. If this happens, it would be safe to say India wasted the NPA crisis in public sector banks. A better solution would have been to use this crisis to do the following –

– The government could have amended the law to bring down its stake below 51 percent in PSBs and bring them under the Companies’ Act. This will give PSBs the ability to hire talent laterally and compensate them commercially. It will also bring banks out of the bounds of the CAG, CVC and CBI, empower their boards and thereby enable them to quickly resolve stressed assets.

– The government could have privatised one or two small banks such as UCO Bank or Dena Bank. It won’t be easy since buyers will worry about their unfunded pension liabilities, but this would still have given the message to the markets that the end game for PSBs is greater privatisation. This would have increased their share price more durably and many would have been able to raise money competitively.

Separately, a change in the entire DNA of PSBs is the need of the hour. Until the early nineties, bright young graduates from India’s premier educational institutions – the IITs, St Stephens’, Stella Maris, Presidency and Jadhavpur University usually wrote IAS exams, RBI, SBI and PSB entrance exams, in that order of priority. Come liberalization, the cream no longer finds the SBIs and the PSBs attractive. As the generations before the nineties begin to retire, these PSBs don’t have the talent internally to compete in the world of finance, which incidentally has been the fastest evolving sector in the world.

On January 15, in a speech to FIMMDA (Fixed Income and Money Market Dealers Association), RBI deputy governor Viral Acharya expressed anguish that PSBs don’t hedge their risk and that despite the RBI giving express permission, neither bankers nor exchanges have come forward with exchange-traded interest rate derivative products. The reason for the blatant underdevelopment of the Indian financial sector is that it is dominated by PSBs, which constitute 70 percent of the sector domestically. These banks are simply unable to attract the high-caliber recruits needed to build a sophisticated financial market.

The conclusion is inescapable – the government has wasted the NPA crisis. And the reason for this unwillingness to reform comes from the fundamental rot that nationalisation of banks injected into our polity. Before nationalisation, the Congress Party that dominated the Centre had no way to get its programmes implemented because state governments never heeded them. Indira Gandhi, the then PM, didn’t have “her staff” in the states.

But in 1969, by nationalising our banks, the central government got its much-needed employee base – the bankers in every district across the country. And what’s more, this workforce came with a booty –depositors’ money – which happened to be far larger than the Union Budget’s kitty.

Is it surprising then that neither the UPA nor the NDA coalitions are willing to privatize PSBs, not even one?moneycontrol