Top five public sector banks of India make up more than 70 per sent market share of Indian banking. These banks have very high NPAs and are being managed very poorly. There are several issues with these public sector banks. We could start with their rising bad loans. Total stressed assets, a figure that combines both non-performing and restructured loans, jumped to almost 11 per cent of lending in March.
Leverage ?, In 2012-13 the average leverage ratio (defined as the ratio of total assets of a bank to its equity capital) was about 16.5 per cent for public sector banks as against about 10 per cent for private sector banks.
Capital? Quite a few public sector banks fail their requirements and some more just scrape by, despite the regulatory “forbearance” which the RBI provides on restructured assets. Government needs to provide more than $28 bn as new capital for these state backed banks by 2018 and much more than this to make them Basel 3 compliant.
Latest report of P J Nayak committee on state backed banks have suggested lot of recommendation for restructuring these banks.
I believe other problem have grown with time because of poor management and forced political decision on these banks. These issues can be solved with time if we can achieve below two major reforms.
Public sector banks should get the equal treatment in compare to Indian private banks. Currently these are regulated by RBI and Finance Ministry. If these banks have to compete with private banks than they should have same yardstick.
Public sectors banks should be completely professionally managed and government should not be involved in any major decision such as appointing directors , chairman.This can be achieved by making a intermediary investment firm between government and these banks.
Some of the recommendation that related to above two points.
Recommendation 2.2: There are several external constraints imposed upon public sector banks which are inapplicable to their private sector competitors. These constraints encompass dual regulation (by the Finance Ministry, and by the RBI, which goes substantially beyond the
discharge of a principal shareholder function); the manner of appointment of directors to
boards; the short average tenures of Chairmen and Executive Directors; compensation
constraints; external vigilance enforcement; and applicability of the Right to Information Act.
Each of these constraints disadvantages these banks in their ability to compete with their
private sector competitors
Recommendation 4.2: The Government should set up a Bank Investment Company (BIC) to hold equity stakes in banks which are presently held by the Government. BIC should be incorporated under the Companies Act, necessitating the repeal of statutes under which these banks are constituted, and the transfer of powers from the Government to BIC through a suitable shareholder agreement and relevant memorandum and articles of association.
Recommendation 4.3: While the Bank Investment Company (BIC) would be constituted as a
core investment company under RBI registration and regulation, the character of its business
would make it resemble a passive sovereign wealth fund for the Government's banks. The
Government and BIC should sign a shareholder agreement which assures BIC of its autonomy
and sets its objective in terms of financial returns from the banks it controls. It is also vital that
the CEO of BIC is a professional banker or a private equity investment professional who has
substantial experience of working in financial environments where investment return is the
yardstick of performance, and who is appointed through a search process. While the non-
executive Chairman and CEO of BIC would be nominated by the Government, it is highly
desirable that all other directors be independent and bring in the requisite banking or
investment skills.
Recommendation 4.4: The CEO of the Bank Investment Company (BIC) would be tasked with
putting together the BIC staff team. BIC employees would be incentivised based on the financial returns that the banks deliver. If such incentivisation requires the Government to hold less than 50 per cent of equity in BIC, the Government should consider doing so, as it will be the prime financial beneficiary of BIC's success.
Recommendation 4.5: The Government should cease to issue any regulatory instructions
applicable only to public sector banks, as dual regulation is discriminatory. RBI should be the
sole regulator for banks, with regulations continuing to be uniformly applicable to all
commercial banks.
Leverage ?, In 2012-13 the average leverage ratio (defined as the ratio of total assets of a bank to its equity capital) was about 16.5 per cent for public sector banks as against about 10 per cent for private sector banks.
Capital? Quite a few public sector banks fail their requirements and some more just scrape by, despite the regulatory “forbearance” which the RBI provides on restructured assets. Government needs to provide more than $28 bn as new capital for these state backed banks by 2018 and much more than this to make them Basel 3 compliant.
Latest report of P J Nayak committee on state backed banks have suggested lot of recommendation for restructuring these banks.
I believe other problem have grown with time because of poor management and forced political decision on these banks. These issues can be solved with time if we can achieve below two major reforms.
Public sector banks should get the equal treatment in compare to Indian private banks. Currently these are regulated by RBI and Finance Ministry. If these banks have to compete with private banks than they should have same yardstick.
Public sectors banks should be completely professionally managed and government should not be involved in any major decision such as appointing directors , chairman.This can be achieved by making a intermediary investment firm between government and these banks.
Some of the recommendation that related to above two points.
Recommendation 2.2: There are several external constraints imposed upon public sector banks which are inapplicable to their private sector competitors. These constraints encompass dual regulation (by the Finance Ministry, and by the RBI, which goes substantially beyond the
discharge of a principal shareholder function); the manner of appointment of directors to
boards; the short average tenures of Chairmen and Executive Directors; compensation
constraints; external vigilance enforcement; and applicability of the Right to Information Act.
Each of these constraints disadvantages these banks in their ability to compete with their
private sector competitors
Recommendation 4.2: The Government should set up a Bank Investment Company (BIC) to hold equity stakes in banks which are presently held by the Government. BIC should be incorporated under the Companies Act, necessitating the repeal of statutes under which these banks are constituted, and the transfer of powers from the Government to BIC through a suitable shareholder agreement and relevant memorandum and articles of association.
Recommendation 4.3: While the Bank Investment Company (BIC) would be constituted as a
core investment company under RBI registration and regulation, the character of its business
would make it resemble a passive sovereign wealth fund for the Government's banks. The
Government and BIC should sign a shareholder agreement which assures BIC of its autonomy
and sets its objective in terms of financial returns from the banks it controls. It is also vital that
the CEO of BIC is a professional banker or a private equity investment professional who has
substantial experience of working in financial environments where investment return is the
yardstick of performance, and who is appointed through a search process. While the non-
executive Chairman and CEO of BIC would be nominated by the Government, it is highly
desirable that all other directors be independent and bring in the requisite banking or
investment skills.
Recommendation 4.4: The CEO of the Bank Investment Company (BIC) would be tasked with
putting together the BIC staff team. BIC employees would be incentivised based on the financial returns that the banks deliver. If such incentivisation requires the Government to hold less than 50 per cent of equity in BIC, the Government should consider doing so, as it will be the prime financial beneficiary of BIC's success.
Recommendation 4.5: The Government should cease to issue any regulatory instructions
applicable only to public sector banks, as dual regulation is discriminatory. RBI should be the
sole regulator for banks, with regulations continuing to be uniformly applicable to all
commercial banks.
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