Financial Scene C.R.L. Narasimhan

The elusive quest for autonomy

Autonomy for the public sector banks (PSBs) has been a perennial goal for policymakers and the banks. A reform agenda has always mouthed operational independence or freedom for banks to operate with reasonable autonomy. Although there are no clear definitions, autonomy in the present context is said to mean freedom for the PSBs to operate independent of their government owners, at least in their day-to-day workings.

This, as recent experiences show, has not always been practicable given the historical constraints brought about by government ownership. The most important consequence has been the dependence of these PSBs on their government owners for additional capital (to remain capitalised). More invidiously, the top management of these PSBs has seldom been able to resist government or political pressures, to say sanction a loan which they would not have touched or go in for a compromise of a bad loan. Of course, there are honourable exceptions but these have been rare. The important point is that such acts of independence are not rewarded.

A desirable goal

All these should not mean that the task of conferring greater autonomy on the PSBs is a hopeless task. Time and again the government and the Reserve Bank of India have been trying to find solutions but the approach has been piecemeal and lacked cohesion.

For instance, steps to reform the boards of banks are now the top priority with the government accepting in principle the P. J. Nayak Committee report. The committee was constituted by the RBI to make recommendations on corporate governance in the PSBs. Yet, even if the well-thought-out recommendations are implemented, functional autonomy may still be elusive given the dependence of these banks on the government for additional capital. The PSBs are committed to retain the stake of government at 52 per cent or above. The NDA government, like the UPA II, will not countenance a fall in government shareholding to below that level. Clearly, as Finance Minister Arun Jaitley said in his budget speech, innovative ways will have to be found by and on behalf of the PSBs to acquire additional capital to meet the capital adequacy norms in the wake of Basel III as well as to meet the higher provisioning requirements.

Well meaning steps

The budget has attempted to confer a measure of autonomy on the PSBs. This is sought to be done by setting up an autonomous bank board bureau that will help identify and appoint managing directors and other senior executives of banks. It will also suggest ways for them to raise capital through new financial instruments. The bureau will be a precursor to establishing a new non-operating financial holding company (NOFHC) that will own the government-owned shares of all PSBs. It is hoped that the holding company will be able to leverage its holding of quality shares and raise money even for the relatively weaker banks. The success of this experiment will depend not only on the composition of the board, but also in its being able to function effectively the way it is being mandated. The best intentions of the government and the PSBs will come to naught if the bureau is cramped either for want of expertise or more likely due to a lack of autonomy. For the PSBs, it may end up to be a cosmetic change — with one majority owner the government making way for a dysfunctional bureau.

The government has probably run out of other options to find funds for recapitalising the PSBs. As the Fourteenth Finance Commission has pointed out, the fiscal responsibility of the government will remain even after the government transfers shares to the NOFHC. The budget has set aside Rs.7,940 crore for capitalising banks, lower than the Rs.11,200 crore it had budgeted for 2014-15 but higher than the Rs.6,990 crore it has allocated so far this fiscal to a select group of nine PSBs, which measured up to new efficiency parameters laid down by the government.

The sums to be allocated and the ways they have been distributed are open to criticism. In the days to come, innovative means for raising funds will have to be thought of. All proposals will, however, have to reckon with the fact that the government will not easily let go its majority shareholding or even countenance a change in the ‘government’ character of these banks.

Autonomy for the banks may remain elusive until they become financially independent. Second, plenty will depend on how the new breed of bank CEOs — selected by an independent bureau — measure up in a fast-changing milieu.

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Printable version | Nov 26, 2021 5:10:30 PM |

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