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Public sector banks: 7 things to know
The Reserve Bank of India (RBI) recently published a report which highlighted issues concerning public-sector banks. A committee set up under P J Nayak, a former banker and bureaucrat, made recommendations. These include dilution of the government stake in the public sector banks to below 50%. The committee has also suggested that the government should repeal the Bank Nationalisation Acts of 1970 and 1980, the SBI Act and the SBI (Subsidiary Banks) Act. Comments made in the report could help you understand some prickly issues facing the banking sector.
Here are seven pointers:
Lack of purpose:
The RBI report stated that the boards of most public-sector banks do not seem to have the required sense of purpose in terms of business strategy and risk management. They are also unable to steer the banks through difficult positions. This is because the boards do not have much powers and governance is weak.
A weak board affects the profitability of a bank’s operations. This leads to a poor oversight over the lending process. This is one of the key reasons for the rise in bad loans. “Unless banks are extremely well-run and with a strong focus on financial returns, they tend to falter,” the RBI report said.
The selection process for board of directors is mainly in the hands of the government. The RBI report, thus, suggests that there should be three-phase process, where powers are transferred to an independent body of bankers.
The government-owned banks are regulated by both the RBI as well as the Finance Ministry. This increases the amount of red tape and reduces the independence of board directors.
According to the RBI, there are many other external constraints plaguing PSU banks like poor pay packages in comparison with private banks. This leads to an erosion of specialist skill-sets required in bankers. “A more level-playing field with private sector banks is desirable,” the report said. These constraints, the RBI believes, can be eliminated if the government’s stake falls to less-than-50% levels.
The RBI argues that even the government will be benefited by such a move. “This would be a beneficial trade-off for the Government because it would continue to be the dominant shareholder and, without its control in banks diminishing, it would create the conditions for its banks to compete more successfully,” the RBI report noted.
The government is also the biggest PSU banks’ shareholder, which has suffered deeply negative returns over decades. Such reforms will, therefore, help earn the government more. This will help it reduce its fiscal deficit – the difference between its expenditure and income. “The fiscal cost of inadequate reform will therefore be steep,” the RBI report warned.
Loan provision is amount a bank sets aside to cover for loans which may turn bad. For this reason, it is not calculated as an asset by the bank, and thus eats into profits. A rise in bank provision means there is an increase is loan defaults. According to the RBI, 79% of the total bank provisions are held by public-sector banks. This reflects the high level of stress in PSU banks’ balance sheets. “Rs 32,295 crore of provisions were held by the SBI group and Rs 45,357 crore were held by the other public sector banks,” the RBI report said. Total bank provisioning stood at Rs 98,593 crore.