Unless govt pushes on this, Indradhanush won’t help
It is surprising bank stocks rallied on Monday because Indradhanush—the 7-point agenda for revamping PSU banks—holds little by way of radical reform. Much of the plan outlined was a mere reiteration of steps that have already been initiated including the government’s intention to capitalise state-owned banks to the tune of R70,000 crore over the next four years. While infusion of capital will help, balance sheets will remain weak for several years because the problem of bad loans isn’t going away in a hurry. That, in itself, will limit the banks’ ability to raise capital from the market at good valuations, if at all they get a look-in from investors. Since privatisation of banks—the only really meaningful solution—cannot take place unless Parliament approves it, the government is attempting to address several issues, such as capitalisation, people, governance and empowerment, through its Indradhanush strategy.
Giving growth/performance capital only to those banks that cross a certain hurdle rate will encourage some efficiency, but the lack of a concrete plan to tackle NPAs is worrying. There is no mention of how the debt of state electricity boards (SEBs), running into several lakh crore rupees, is going to be recovered or that from wilful defaulters or highly-leveraged promoters. The press release merely recounts the many measures put in place by RBI—including the joint lenders forum and 5/25 scheme. While a bad bank—as many have demanded—is a bad idea since it lowers the incentive to recover bad loans, what is required is a crack team of professionals whose task it will be to get promoters to cough up more equity or to find buyers for the assets. This team must have government backing to take on powerful SEBs and private promoters so as to, in many cases, get them out of the firms they control. Adding to the number of debt recovery tribunals can hardly help given how the existing DRTs are so poorly staffed and barely function—the tens of thousands of crore rupees locked up in litigation is evidence of this.
As for all the noise the government has made on picking up talent from the private sector, only Bank of Baroda has got a private sector CEO—the new Canara Bank CEO has spent much of his career at SBI. Even if other private sector bankers had signed on, it would be virtually impossible for them to change the work culture so long as the unions are around and as long as banks have to be run keeping in mind the CBI/CVC/CAG pressures. While the government says it intends to “provide greater flexibility in hiring manpower”—sounding as though it is making a big concession —there is no talk of firing, without which PSU banks will find it hard to cut the flab or impose discipline. Nor is it clear what role the Bank Board Bureau (BBB)—a team of ‘eminent professionals and officials’ to replace the Appointments Board to select whole-time directors and non-executive chairmen—can play. Suggesting that the BBB would be ‘formulating appropriate strategies’ for banks is odd—wouldn’t banks want to rope in full-time consultants for what is a highly competitive and specialised business? This revamp plan isn’t going to get investors a pot of gold.