Reviving PSU banks

Finally, PSU banks have reasons to smile

The package for PSU banks announced by the Finance Minister must have surely come as a breath of fresh air for the beleaguered PSBs. The package basically focuses on 4 areas viz. Capital infusion, bank board revamp, de-stressing and empowerment.

Capital infusion is simple…

The capital infusion of Rs.20,000 crore for this financial year was already announced and today was only a ratification of the same. This forms part of the Rs.70,000 crore infusion over 3 years. This base of Rs.70,000 crore will allow banks to leverage and raise another Rs.110,000 crore from the market so that the overall target of Rs.180,000 crore for bank recapitalization ahead of Basel III can be achieved. It is surely a great boost for PSU banks as they have been capital starved for too long; and this has negatively impacted their loan books.

Bank board bureaus…

This is a slightly more complicated announcement. A bank board bureau will be constituted which will monitor each PSU bank on key performance parameters. Secondly, private sector talent will be infused into PSU banks and that exercise has already started. Thirdly, the government is also planning to put in place a system of ESOPs and market-driven incentives for senior management of PSU banks. While all these are laudable, the question is how will the banks extricate themselves from the reality of government control? That question remains unanswered.

De-stressing, but how?

The package has left the aspect of de-stressing largely ambiguous. They have rightly identified steel, infra, power and sugar as the key sectors responsible for NPAs. It is, however, not clear what package the government proposes to overcome this problem. The FM has restricted himself to announcing that banking stress will be dealt with separately. Details are still awaited.

Empowerment of banks…

The government has surely made a start by announcing that 5 key PSU banks will get new chiefs. But empowerment lies at the core of the problems of PSU banks. For years, the banks have been used as a delivery mechanism for the umpteen government welfare programs. To an extent, this has been responsible for the bad assets of banks. The whole issue of PSU banking reforms will come and halt on the subject of empowerment. Banking heads with private sector credentials and tighter supervision can help up to a point. Beyond that point, the banks will need the freedom to decide and act in the best interest of its stakeholders. How the government handles this challenge, will be its real acid test! ©

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