Dear Jaitley, to instil professionalism in public sector banks, stay away from them

In the wake of recent bribery scams/financial frauds involving employees of public sector banks, or PSBs, finance minister Arun Jaitley on Thursday made a statement promising to instill professionalism in the management of PSBs.

Quoting his exact words: “Professionalising the management of the banks, we have taken some decisions in this regard. We expect banks to have better risk management. The department of financial services has been actively working in this regard” Jaitley said.

The finance minister said the “recent incidences (bribery scam at Syndicate bank, deposit scams at Dena and Oriental Bank of Commerce) have been disturbing. I only hope that they are drop in the ocean. We have all learnt the lessons from such incidents, and there will be no repetition of them.”

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What exactly the minister meant by saying that he will professionalise the managements of our state-run banks is a matter of debate? Does Jaitly’s statement mean that currently the public sector banks, which account for 70 percent of the total assets of banking system, are run by a group of unprofessionals? Of course not.

There is nothing wrong with the professionalism or ability of the people, who head the banking institutions in the public sector. Public sector bankers are as good and competitive as their counterparts in private, foreign banks. The fault lines leading to the cases of bribery and deposit scams like that happened in Dena/OBC are systemic and non-compliance.

Underperformance of state-run banks compared with private banks is because the former do most of the risky lending in the country, such as loans to infrastructure and agriculture, while the latter mostly go for safe assets.

If Jaitley is honest in bringing in the magic idea of professionalism in PSBs, the first thing he should do is to instruct his ministry not to intervene in the operations of PSBs and, more importantly, take steps to empower the boards of PSBs by inducting external experts and young professionals-something the previous government under the UPA-government totally ignored.

A report tabled by a committee headed by P J Nayak, former Axis Bank chief, has already laid out a road map to strengthen the public sector banking system. The prescriptions include empowering the boards of state-run banks through a three-stage transition process and bring down government stake in state-run banks below 50 percent-in other words, privatize the government banks.

The government cannot be in the business of banking, and should, instead focus on only governance, for which it has the public mandate. The policymaker and the market player being the same party-the government-create conflict of interest.

Professionalism can be brought in by treating the government banks as private organisations and gradually reducing their dependency on the government to meet their capital needs. Those banks, which are unable to raise capital and manage on its own, should cease to exist or merge with another bank, if there is synergy.

At present, the finance ministry plays a big role (not necessarily a constructive one) in the operations of public sector banks. These include giving annual targets to the public sector banks to achieve sector-wise credit targets and nudging banks on matters relating to restructuring of loans and even pricing.

During the UPA regime, public sector banks were flooded with missives from the North Block almost on every fortnight that impacted the power of respective banks managements in decision making. The government’s micromanagement often contradicts with the desired business path of individual banks.

If professionalism is the idea, following factors must be looked at:

One, state-run banks are subjected to force-lending to certain sector even though it doesn’t make economic sense for them if one looks at the viability aspect. One such example is agriculture lending. Every year the agriculture targets for banks set inthe finance minister’s budget speech goes up even as the share of agriculture a percentage of GDP has beencoming down over the years. The end result isasubstantial surge in bad loans from the segment.

Here one question that begs an answer iswhy should the finance ministry set a target, whenthe the sector regulator RBIitself has put in place a target under itspriority sector lending norms. As per these norms,banks are required to extend 40 percent of their advances to the priority sector, which includes agriculture, education, MSMEs etc. Under this, the lending to agriculture has to be 18 percent.

Second, state-run banks are the most convenient tools for the government to push their mass populist schemes such as the 2008 farm loan waiver and the current round of loan waivers being contemplated by southern states of Andhra Pradesh and Telangana. Distribution of free bank accounts to push financial inclusion - somethingthatnever worked in the past .

Many banks would have outrightly denied to take up the role of carriers of populist schemes if their managements/boards had enough power to talk back.

Third, the unholy nexus between the politicians and businessmen is difficult to die down. State-run banks are often subjected to political pressure to lend to certain corporations eventhough their own assessment would have suggested said otherwise.

For the government to stay away from the management of public sector banks, it is must to bring down their holding in these banks and empower the bank boards. The P J Nayak recommendations give a clear roadmap on how to go about on this.

In the absence of string corrective measures in the structure of these banks, it is difficult to bring in professionalism in government banks.

The earlier it is done, the better.