Reserve Bank Deputy Governor S S Mundra today said the level of bad loans and restructured assets rose to 12 per cent while for the public sector banks it has jumped to 15.4 per cent as of the June quarter.
“The level of stressed advances which include NPAs and restructured assets for the industry, it is around 12 per cent but for the public sector banks, it is around 15.4 per cent as of June 2016,” Mundra said at a banking event.
He also said that as a result the return on assets for the public sector banks has turned negative during the quarter and combined the public sector banks are in net losses.
Mundra, however, said some of the reasons for such dismal performance of the state-run banks are external and not in the control of the bank managements.
He said the important lesson from such events is that in the absence of strong structural and governance reforms, consistency of the performance would always remain susceptible to such events.
“There is a need for structural and governance reforms,” the deputy governor said, adding that for the private sector banks such reforms have to be focused on misaligned incentives and compensation.
He further said the overriding priority is to complete the ongoing clean-up process in the state-run banks’ balance sheets.
Resultant provisioning needs coupled with meeting the Basel III norms, migration to the IFRS and to capture true market channels in growth funding would entail recapitalisation of most of state-run banks, he said.
“My belief is that seeking this capital from external sources at this stage will be difficult and it will also be value eroding for majority owners now,” Mundra said.
Explaining further, he said the kind of book value and market prices which most public sector banks have now, raising capital from external sources will be detrimental for them.
He said though the government ownership of banks has resulted in crucial stability and resilience in difficult times, the immediate road-map for them should be towards full managerial autonomy.
“If the government remains the largest shareholder, not necessarily the majority shareholder, it still serves the intended purpose.
But the benefit it brings at the same time it releases these banks from multi-institutional oversights and control,” he said.
If this can be done, then HR autonomy would flow and banks would be able to move towards a competitive compensation system, flexible hiring and move away from collective bargaining which is the present practice.
He said going forward, the Bank Boards Bureau should also cover selection of other board members, which they don’t do now.
Even in the case of selection of chairman and CEO, role of bureau is only recommendative now as the selection is done by the Cabinet Committee of Appointments.
Calling for longer tenors for CEOs of public sector banks, Mundra said “continuity of top management is crucial”.
“I would suggest a five-year term for a state-run bank CEO, though initial appointment can be for three years with certain milestones as riders for extension. If those milestones are achieved or a satisfactory explanation is available for not achieving them, then at the end of the third year, there should be an automatic extension for another two years without any questions being asked,” the commercial banker-turned-central banker said.
“If there is a reasonable tenure, it allows someone to prepare a strategy and see that it is implemented. If tenure is very short, there maybe an inclination to postpone the problem because it can be handled in next generation,” he added.