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Monday, December 06, 2021

The rot stops here

Government does well to acknowledge that the way public-sector banks are run is the problem.

By: Express News Service |
January 6, 2015 12:16:39 am

That Prime Minister Narendra Modi attended a bankers’ retreat, or Gyan Sangam, along with the finance minister and the Reserve Bank of India (RBI) governor, signalled a sense of urgency among the country’s policymakers towards addressing the rot in state-owned banks.

India’s public-sector banks (PSBs) are weighed down by stressed loans amounting to 12.9 per cent of their total advances, as against only 4.4 per cent for their private counterparts. Given that PSBs still account for over three-fourths of outstanding advances and deposits in the Indian banking system, their health is a matter of concern. Without a strengthening of their balance sheets and an infusion of additional capital, how would these banks be in a position to fund an economic recovery, when it happens?

The positive takeaway from the Gyan Sangam, then, was the message that the government is mindful of the root of the rot, which has to do with the manner in which PSBs are run. Their boards aren’t empowered to take commercially prudent decisions and are accountable only to their political masters, to whom they largely owe their appointments. The only real solution is to reduce the government’s shareholding to below 50 per cent, which will free them from political and bureaucratic interference. But this requires amending the existing bank nationalisation laws, which may not happen immediately.

But there are many things the government can, and should, do without having to seek approval from lawmakers. It could start with setting up an independent high-powered body tasked with the selection of people on PSB boards, including those with private-sector backgrounds.

The recommendation of this body, comprising respected professionals and public-spirited individuals, should be ordinarily binding on the government. Attracting talent through lateral recruitment need not be confined to the top jobs. The opposition by unions can be partly neutralised by offering stock options to employees, which finance ministry babus have for too long been resisting. When private lenders can do this to retain talent, why not allow PSBs too? It is time PSBs and even other state-owned companies have flexibility in fixing executive compensation.

Why should a PSB chairman’s salary, for instance, be pegged to that of an additional secretary? The current crisis is an opportunity for the government to initiate human resource reforms that will restore the public’s trust in PSBs. These, together with falling interest rates, enabling booking of treasury gains on their government bonds’ portfolio, may help improve flagging share valuations of PSBs. That, along with some structural reforms, will make it easier for them to also raise much-needed capital from the markets.

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