PSU Banks

What exactly do they require from the government?

As the Union Budget approaches, the big question is what is in store for PSU banks. Obviously, this is the one sector that requires strong medicine from the government and also a helping hand. But this budget needs to go beyond incremental stuff. What is required is a complete rethink of PSU banks from a short term and long term perspective.

Address the NPA issue…

 You just can’t dispute that. Indian banks started this calendar year with nearly $62 billion worth of NPAs. The first priority is to make an in-depth analysis and write off what is not recoverable in the foreseeable future. The 5:25 scheme also needs to be reviewed as that is distorting the view on actual NPAs. The AQR undertaken by the RBI is a step in the right direction. Banks should be encouraged to write off their NPAs over the next four quarters and have a clean balance sheet by March 2017. The process needs to begin in this budget and time is running out.

Next step is to build the book…

It is not enough to complain that PSU banks are not exactly playing a critical role in financial intermediation. It all stems from the NPA problem. Hence the need arises to ensure that banks are adequately capitalized. Unless banks are capitalized, they will not be in a position to build their loan books and hence profitability will continue to be elusive. This budget must urgently address the need to ensure that banks at least have the capital support to go into the capital markets and raise money.

Time to change ownership…

Government ownership of banks was an idea that pertains to 1969 and was reiterated in 1980. That argument does not hold any longer. There is no great logic for keeping FDI in PSU banks at 20% and it needs to be increased to 49% and 74% in two tranches. With financial inclusion achieved to a large extent, the government does not need to burden banks with bad loans. Private ownership and private capital will bring in more market accountability in these banks. That exercise needs to start in this very Union Budget.

Rethink how they are regulated…

More than change in ownership, it is change in managerial and operational autonomy that is a must for these banks. Let banks pay competitive packages for their directors, let them recruit quality talent at a cost and let there not be restrictions on expansion. This shift in mindset is probably one of the most important shifts that have to be achieved in this budget. Without a change in autonomy, the first three points will not add much value. This budget needs to reverse the mistakes of 1969 and 1980. That logic does not hold any longer today! ©

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