Jaitley is repeating Sinha, Chidu: To ring in autonomy govt must cut bank stake below 51%

The biggest take away from the two-day bankers’ meet in Pune, Gyan Sangam, was the promise made by Prime Minister Narendra Modi and Finance Minister Arun Jaitley to state-run bankers regarding the autonomy in their operations. Speaking at the conference Modi said the government would stay away from ‘political interference’ in state-run banks. Bankers will not get even a call from his office, Modi said. Jaitely too promised to let these banks “to deal with commercial issues with a commercial mindset” as “they know the best where the shoe pinches". But both Modi and Jaitley were silent on the biggest reform needed to salvage these entities — privatising government banks by lowering government stake to less than 51 percent. At present, the government owns majority stake in the 27 public sector banks in the country and more than 75 percent in a handful of them. Until the government readies its mindset to trim its stake below 51 percent, it is highly unlikely that the state-run banks, which have been the perfect tools time and again for governments to roll out their populist measures, will get the real autonomy. In fact, at the Gyan Sangam, state-run bankers had formally put forward a suggestion to the government to trim its holding in these banks. Also, this is something which the P J Nayak committee on banking reforms had recommended in the past. [caption id=“attachment_2029781” align=“alignleft” width=“380”] Jaitley’s predecessors P Chidambaram (UPA) and Yahswant Sinha (NDA) had also made similar promises to state run banks, but nothing materialised. PTI[/caption] Lowering its majority stake doesn’t necessarily mean to throw these banks into the hands of private corporations. The government can still retain a significant say in public sector banks even with a holding less than 51 percent by distributing the fresh issue of shares to retail shareholders. Before committing fresh promises on autonomy of government banks, Jaitley should perhaps look at the fate of similar promises made by his predecessors and how these promises met a silent death. Back in the budget speech of 2000-01, the then finance minister, Yashwant Sinha made a commitment on autonomy for state-run banks by accepting the recommendations of the Narasimham committee on the banking sector reforms. The committee had recommended that the government should reduce holding in nationalised banks to 33 percent, without changing the public sector character of banks. “It is proposed to bring about necessary changes in the legislative provisions to accord necessary flexibility and autonomy to the Boards of the banks,” Sinha said. The promise of autonomy was repeated by his successor. When the UPA came to power, finance minister P Chidambaram too made a tall promise of letting state-run banks do their own business. “We are willing to give banks more autonomy. But with autonomy, hand-in-hand, will go more accountability. More autonomy would mean more accountability, more responsibility and willingness to take on greater responsibility in a growing economy," Chidambaram said speaking at a function in New Delhi in June, 2005. The key difference here was that Chidambaram categorically ruled out privatisation of state-run banks. But what was common, and noteworthy, in both cases was that the promises remained promises and the public banks remained as extended arms of the ruling governments to implement the political agenda. Autonomy remained elusive for state-run banks. The trend of intervening in daily operations of state-run banks became more evident during the UPA-II, when major business decisions of state-run lenders originated in the North Block and not at the management meetings of public banks. Chairmen and top executives at these banks turned nothing less than puppets fretting over the phone calls made by politicians and bureaucrats from Delhi. Micromanagement in state-run banks was visible in multiple areas ranging from forced loan-recasts to certain sectors, pricing of and sanctioning of credit, appointment process of executives and implementing massive farm loan waivers. State-run banks were compulsorily asked to lend to the agriculture sector even when farm output as a percentage of GDP has been falling drastically over years. The lending target was kept increasing through budgetary allocations every year to please the vote bank, even though many banks witnessed severe stress on their books from this segment. The pain emerging from the farm sector multiplied after the Chidambaram-sponsored Rs 70,000 crore debt waiver in 2008. Even when agri-bad loans shot up to double digits to many state-run banks, they were forced to increase the exposure to the segment. When the frequency of missives from the government terrorised state-run bankers and political influence worked as motivating factor than lending prudence behind many large ticket corporate loans, stressed assets (non-performing assets plus restructured loans) of public sector banks drastically increased. Now it is about 13 percent of the total loans given until September. Absolute autonomy for state-run banks without government ceding the control will not happen because: For one, public sector banks are always at the mercy of the central government to meet their capital needs and look up to the annual capital infusion to stay afloat. The capital requirements have gone up substantially in the recent years on two accounts. One, the dramatic rise in the stressed asset levels, for which banks need to set aside more money under current norms. About Rs 2.7 lakh crore loan have turned non-performing till September and another Rs 5-6 lakh crore loans have been restructured. Two, the migration to the Basel-III norms requires state-run banks to have an additional Rs 2.5 lakh crore, which includes the additional capital buffer they needed to withstand tough times. Given that except a few large banks, others do not have the ability to bargain funding in the market, these banks will continue at the mercy of the government and will remain as its loyal, obedient divisions and not independent institutions. Second, even if the government shows the political will to give autonomy to state-run banks, it will be difficult for Modi or Jaitley to make sure all influential members even in their own party, follows the principle, needless to speak about other-party politicians. The political-corporate nexus to exploit the state-run banks takes birth across various levels using expert middle-men to make available money to a particular company. This unholy nexus mostly targets state-run banks since they are more vulnerable to such excesses than private banks. It is a matter of debate that how many of the public banks would have agreed to implement some of the biggest populist measures the country has seen such as the 2008 farm loan waivers sponsored by Chidambaram, which permanently destroyed credit culture of borrowers inflicting significant damage on banks or the recent Jan Dhan Yojana launched by Modi, where public banks were literally put on gun point to meet the magical targets of crores of new bank accounts, flouting standard KYC norms, within days and weeks. At least in their promises, both the prime minister and the finance minister have touched upon the most needed step to rescue state-run banks, which control 70 percent of the banking system. But, unfortunately, beyond the promises, the Gyan Sangam has been largely silent on the biggest reform these entities need—taking them out of government control. Modi can become the real agent of change to rescue state-run banks by stating his stance clear on the privatisation of nationalised banks. Trimming the government stake below 51 percent in state-run banks will make these entities better-run, professional institutions besides enabling them raise the required amount of funds time to time based on efficiency and competence and not depending upon which bank meets the government targets first, as is the case now. Until then, autonomy of public banks is just an illusion.