Editorial: Can’t bank on Parliament

By: | Published: August 4, 2015 12:27 AM

Unless MPs agree, banks will continue to lose value

A decade ago, PSU banks accounted for 63% of the value of all listed banks in India. Today, this is down to 31%. Put another way, if PSU banks were to have retained their share of market capitalisation, they would be worth double the Rs 3.8 lakh crore they are today. While MPs continue to obstruct Parliament and fail to pass legislation that makes meaningful reform like privatisation possible, hundreds of thousands of crore of public wealth is being leached out to shareholders in the private sector—we are talking of banks here, but it could be telecom firms when you look at the destruction of MTNL and BSNL, or just look at the increase in the value of government shares in Maruti and Hindustan Zinc after privatisation.

It is in this context that the latest round of capital infusion into PSU banks must be viewed. The government estimates they need Rs 1.8 lakh crore over 4 years to grow their lending at even a modest 12-15%—this, by the way, will also see their share in market value fall since a rapidly-growing economy needs a credit growth of 18-20% per year. Since banks cannot raise this in the market—only 2 of them are valued at more than their book value—the plan is to give them Rs 70,000 crore of government equity over 4 years and hope they can raise the balance on their own through share premiums. For this transformation to happen, banks are to be given the freedom to run as board-managed companies while the government works on systemic issues beyond the control of banks. While soaring NPAs—stressed loans for PSU banks are 13.5% of outstanding loans versus 4.6% for private sector banks—are partly a result of how PSU banks operate, they are largely a product of the large infrastructure loans these banks have made. To that extent, the finance ministry simply has to ensure state electricity boards start repaying bank loans and, if need be, insist state governments take over their loans—unless this happens, Kingfisher will look like small change as RBI’s latest financial stability report makes clear.

While the outcome on SEBs is far from clear, even it were to be positive, it is obvious the only way to fix PSU banks is to free them from the CVC/CAG/CBI clutches, even if you assume the government can deliver on the promise of no political-bureaucratic interference. Today, even if an SBI is able to oust promoters from a steel plant which is an NPA, it cannot enter into a negotiation with a Tata Steel to sell this plant, it has to have a public tender. The other way to fix banks is to privatise them. Neither, however, is possible today since this requires Parliament to legislate on it—banks were nationalised through an Act of Parliament, so even the holding company structure prescribed by an RBI committee needs Parliament’s approval. In such a situation, the next best bet is to give capital only to well-run banks and let the others die a natural death—with 850,000 people working in PSU banks, however, this is not politically feasible. Which is why the government’s plan is to give a certain amount of equity to all banks to get to basic capital adequacy norms, and growth/performance capital to only those who cross a certain hurdle rate, but its success hinges on everything coming together perfectly. In the real world, that seldom happens.

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