Finance Minister Arun Jaitley’s announcement that the government will soon reduce its stake in public-sector banks (PSBs) must be welcomed. The ongoing bloodletting in the Indian banking system, in the form of increasing disclosures of non-performing assets (NPAs) and the associated fall in profits and market value, might have been the clinching factor in this decision. For the most part, the need for these reforms has been advocated in PSBs, even though NPAs have risen in private-sector banks as well. Jaitley’s assurance, however, is in stark contrast with the views of RBI Deputy Governor S.S. Mundra, who recently said, “… the issues we are seeing today have not much to do with the ownership of the banks. It is more a governance issue than an ownership issue.” But any attempt to delink the two — government ownership and below-par governance — would not only mislead the discourse but also militate against the reform process.
For one, while the NPA crisis affects almost all banks, it does not affect them equally; PSBs’ performance is far worse than that of private banks. According to Crisil, “As much as 85 per cent of banking system weak assets are in the books of PSBs”. In private-sector banks, by contrast, NPAs are a much smaller percentage of their advances, and credit and deposit rates for FY15 and FY16 are double that of PSBs. As such, data suggests that ownership matters.
The other fallacy is that ownership doesn’t affect governance. The P.J. Nayak Committee report (2014) on the governance of bank boards is illuminating in this regard. After poring over “board notes and minutes of the meetings”, it found that, as against private banks, PSBs not only tabled far fewer issues but also deliberated on them in less detail. Surprisingly, even on development concerns such as financial inclusion, not to mention profitability, PSBs focused less than their private counterparts. Thanks to unabated political interference, PSB boards are “disempowered”, reduced to deliberating about taxi-fare reimbursements, college lectures and ministerial visits. Recapitalising PSBs is just first-aid, and one that government cannot provide beyond a point due to fiscal constraints. The sustainable way to improve the governance of PSBs requires a shift from the deeply politicised “government-as-sovereign” role to “government-as-investor”, as suggested by the Nayak Committee.