PSU Banks need radical restructuring

Had Punjab National Bank (PNB) not been owned by the government , by now there could have been long queues at the bank’s branches and ATMs for withdrawal of money – a run on the bank. This will never happen for a PSU bank as its majority owner, the government, will not allow it to fail.

The depositors’ money is safe in all public sector banks. Or, for that matter, all commercial banks in India. But the Rs 11,300 crore letter of undertaking (LoU) fraud at PNB has exposed the soft underbelly of PSU banks. They have around 70% share of banking assets and a much higher, 90% share of bad loans or non-performing assets (NPAs). Banks do not earn any interest on NPAs and, on top of that, they need to set aside money or provide for them. No wonder then that only five of 21 PSU banks have reported profits in the December quarter; their collective loss is Rs 18,097 crore in that period.

Data available with India’s largest credit bureau also shows that the share of PSU banks in cases related to wilful defaults is also far higher than private banks – around Rs 93,500 crore of Rs 1.12 trillion in September 2017. Wilful defaulters are those who have money but do not pay up. When it comes to fraud, again these banks are softer targets. A recent Reuters study says Indian state-owned banks have reported 8,670 cases totaling Rs 61,260 crore over the last five financial years up to March 31, 2017. This amount will rise further in the current financial year with more frauds coming to light.

If you ask a public sector banker this question, he will narrate, with a tinge of pride, many stories extolling the stellar role this set of banks has played for nation-building. You may even be confronted with many counter questions: Who gives money to the farmers? Who keeps tiny deposits? Have the private banks gone beyond the city limits? All these come with an underpinning of romance and nostalgia.

The edifice of the PSU banks is crumbling. There are many reasons behind this. They have neither market discipline nor regulatory discipline. The market cannot punish them for non-performance. Even if no one wants to touch their shares with a barge pole, the government always steps in to infuse capital to keep them afloat. In the past 31 years, between 1985-86 and 2016-17, the government had infused some Rs 1.5 trillion in this set of banks. On top of that, it has committed to infuse Rs 2.11 trillion into them in phases; out of this Rs 88,000 crore has already flowed in. When it comes to regulation, it’s not ownership neutral. This means RBI cannot treat these banks the same way it does private banks.

The biggest issue that has been plaguing the industry is the lack of accountability. The boards of such banks are often full of rent-seekers. Far from guiding an organisation with vision and mission, the directors – of course, not all of them – broker loan deals which often go sour. Even though these bank are listed, the norms which stipulate that at least one-third of the directors must be independent are not applicable to them. To make matters worse, the CEO and MD have a much shorter tenure compared with those in a private bank.

Frequent government interventions in various forms – ranging from being forced to support the infrastructure sector by giving big-ticket loans, to making the financial inclusion project a success, and even picking up a broom and cleaning up neighbourhoods where bank branches are located as part of the Swachh Bharat Abhiyan – make matters worse. At the senior level, they also do not get market-related salaries.

Periodically, we discuss privatisation, mergers and consolidation of PSU banks but the status quo prevails. Privatisation is a politically sensitive issue while making mergers meaningful is a tough task. At the moment, 11 out of 21 PSU banks are under the so-called prompt corrective action or PCA framework of the RBI which restricts their activities. Even after a fresh capital infusion, they will probably not be encouraged to grow. This is a new paradigm in Indian banking industry. Some of the PSU banks are becoming irrelevant. At the same time, new entities are encouraged to enter the fray. They are in different shapes and sizes – universal banks, small finance banks, payments banks. Unless we design a radically new governance structure for these banks, they will continue to cede market share to private banks and non-banking finance companies.

This is the first in a series of articles in HT in light of the recent controversies related to PSUs.

tamal.b@livemint.com