As Modi govt completes a year, public banks are deeper in distress and await a miracle cure

The Narendra Modi government, which is set to complete a year at the Centre, wants India’s public sector banks (PSBs) to perform well. They must improve the business in a tight competitive environment, cut down bad loans despite a sluggish economic recovery and absence of fresh private investments. The annual capital infusion to each one of these banks would depend purely on efficiency. But here is the catch. PSBs should make the business improvement a reality within certain conditions. Condition 1# PSBs should perform even without adequate manpower. A number of state-run banks have their positions at senior management levels vacant. Four banks do not have chiefs as of now and the number would be seven by end-June if new appointments are not made. There is massive talent shortage at most of the PSBs. The government’s own estimate is that about 25 percent of the staff would retire in the next five years, but not sufficient number of fresh hiring. Presumably due to absence of adequate talent within PSBs, the government, in February, issued advertisement seeking aspirants from the private sector. Not many people showed interest on account of poor compensation offered. [caption id=“attachment_2232172” align=“alignleft” width=“380”] AFP[/caption] To add to the woes, the very notification of the government seeking appointment of private candidates have been questioned by the Supreme Court on a PIL that said aspirants from public sector for the top job are being given a raw deal. Condition 2# PSBs should operate without capital. Beginning last fiscal year, the government sharply cut down the capital infusion in state-run banks discovering that many of them aren’t performing or using the capital allocated well. Their non-performing assets (NPAs) are on the rise and fresh business acquisition has slowed in recent years. Logically, the government said from now on only the performers will get money and the rest should fend for themselves. They can always raise money from markets. But, the government is not bothered though whether someone will be interested to invest in these entities with poor performance and high bad loans. On the other hand, the government is in no mood to pare its majority stake in these banks and make capital available. The capital required by state-run banks to meet the Basel-III norms itself is about Rs 2.4 lakh crore. That apart they also require large chunk of capital to make bad loan provisions and expand business if credit growth picks up. Condition 3# They should perform within limited or no autonomy to operate. Finance minister Arun Jaitely, perhaps forgot that India’s 24 PSBs were never independent entities when it comes to freedom to do business. They have always been the tools of the government to implement its populist programmes, be it the Rs 70,000 crore farm debt waiver of 2008, directed lending to certain sectors or being easy targets to cronies on account of corporate-political nexus. Jaitely, perhaps, also didn’t recall, part of the reasons for high NPAs is the rampant credit push by state-run banks since 2008. During this period, banks turned a blind eye to credit appraisal norms to meet the credit growth targets and be in the good book when the finance minister calls for review meetings. Chairmen of state-run banks, who stayed for an average tenure of 2 years at the top were least bothered about what happens to the bank after they exit. Focus was given only on quantity of assets, not quality. All those easy loans returned as bad and restructured loans to haunt the same institutions. So, in effect, after long period of mismanagement and micromanagement, the government has suddenly taken up the issue of performance and cut down capital. There are many Vijay Mallyas out in the market, who still owe thousands of crores to banks. Condition 4# Self motivation should be the key for PSB staff when they are out in the market to acquire business competing with private bankers. Because, unlike in the private sector, compensation for staff in state-run banks is not performance-linked. Whether you work or not, it hardly makes any difference since the pay is the same. In this context, self motivation is the key. Widening gap of compensation levels in public and private sector is something the Reserve Bank of India (RBI) has highlighted more than once in the past. But the government has given a deaf ear and even feels that there is no shortage of senior staff in state-run banks. Condition 5# Business improvement is must but after meeting targets on roll-out of government schemes. In last year, majority of the government bank staff spent a considerable amount of time to hunt for new account holders to meet targets set by Prime Minister’s Jan Dhan Yojana. Almost 15 crore accounts were opened since August last year under this scheme. The breakneck speed at which the scheme was implemented won even a Guinness record for the Modi government but at the cost of several crores of duplicate and non-operative accounts. In the next stage, the government is now planning to bundle more benefits, such as health schemes, to the Jan Dhan accounts, which would mean tremendous pressure on banks to achieve the new targets. In short, PSBs need nothing short of miracle to improve their performance, or else the only option is to wait for a slow, natural death.